What does your business report card look like?
Employees receive regular performance appraisals and students receive report cards. But how do you get an independent assessment of how your business is performing?
It can be challenging to hold yourself to account, but the end of financial year is a good time to have an honest discussion with your trusted advisors and put your fiscal year end under the microscope.
“First, you need to make sure your numbers for revenue growth, profitability and liquidity are in a format comparable to last year – a ‘like for like’ analysis,” explains Adam Ortmann, Head of Client Risk Analysis at Macquarie.
“If you’re going up in line with inflation, that’s pretty good. If you’re growing over five or even ten per cent you’re probably an A. But if you’re falling backwards 10 to 15 per cent, overdrawing on overdrafts or behind on tax payments, you might earn yourself a ‘room for improvement’.”
Another way to look at it is to consider how your business would cope with a setback. “Think about what would happen if your best clients or staff members left, or if interest rates rose,” says Ortmann.
Grant Riordan, Macquarie’s NSW Head of Business Banking Credit, says knowing your breakeven point is a good way to assess this – and understand what really drives your business at the same time.
“Work out what you personally need to live on, what you need to keep the office running and staff paid, and any other operating costs. This figure gives you a real time performance indicator, month on month.”
Riordan says he would also give straight As to any business able to cover its fixed costs with certain income. “For example, real estate agents have a combination of fixed and volatile income: rent rolls and property sales. If your fixed cost coverage ratio is strong, you won’t need to depend on that variable income – it’s just the cream on top.”
Liquidity is another assessment measure that needs to acknowledge the variability of your business revenue. “This is your ability to meet short term objectives with short term assets such as cash on hand. You generally need enough liquid assets to cover your current liabilities, but if your monthly revenue is unpredictable you may need a bigger buffer to carry you through slow periods,” says Riordan.
Check in with clients and staff
A holistic end of year assessment goes beyond just the financials. Ortmann and Riordan both recommend carrying out client and staff surveys as part of your business performance review, making time to meet with clients to find out why they continue to choose your services, and checking how your staff and client retention rates are tracking.
“Ask them what you do well, what competitors do well, what you can do better,” Ortmann suggests. “Research shows finding a new client is seven times more expensive than keeping your existing ones. There is a correlation between happy staff and happy clients, so it’s essential to get their input too.”
Where do you sit on the bell curve?
To really understand your performance, you also need to know where you are in comparison to your competitors. You might be about to give yourself a gold star for growing six per cent this year – but what if your industry is averaging ten per cent growth?
Macquarie’s industry benchmarking reports can help you check this, as can data from your industry association and insights from your banker and accountant. And don't underestimate the power of asking your people. “Getting input from a variety of people is good for your business, and involving employees also has the added benefit of improving staff engagement,” says Riordan.
Draw a line in the sand
“July 1 is a line in the sand for bookkeeping, but if you’re keeping a watchful eye on your performance there shouldn’t be any surprises,” says Riordan.
Ortmann suggests planning now to ensure you make the most of any potential tax breaks or rebates.
“A good small business accountant who specialises in tax can make a meaningful impact – they’ll understand the potential of research and development rebates or franking credits. Seek their advice on structuring purchases before the end of June – such as software or technology upgrades to improve efficiency.”
This means taking the time to discuss your business activity, not just the bookkeeping reports.
And if you’re planning any major changes to the balance sheet, such as an acquisition or structural change, or even switching your accounting software, it’s smart to align it with year end. It will help you compare like for like next year.
So how is your report card looking for the 2015 financial year? The most important thing to remember is it’s not just about one metric, whether that's revenue growth, profit or costs.
Successful businesses may have changing priorities, but they take a holistic view. You need to keep an eye on profitable growth as well as scalable processes and efficiency.