As a business owner, it was easy to get emotional in 2020. The suddenness and immediate severity of the economic collapse had never been experienced in modern times. The country went from record employment to recession seemingly overnight, and the resulting desperation has been on full display every day since. Many have asked what can be done, and this has been (and will continue to be) the best answer: Focus on the data. Keeping score by focusing on company data will enable businesses to make the right decisions and emerge from this dark time with intact staff and critical competitive advantages.
Lurid global headlines, although completely valid in the context of a pandemic, do not contribute to company survival. Well-reasoned, timely decisions do, and these require business owners to put on their own oxygen masks first. Flight attendants agree—no one wants a bunch of crazed, oxygen-starved people trying to manage a crisis. Help yourself first, then help others. For a business, cash is oxygen, as is a motivated staff and good management reports. To maintain all three, key performance indicators (KPIs) for five business areas are needed.
The Five KPIs: Scorecards for Business
#5: Cash and Finance
This is #5 on the list, but it can become all-consuming if not managed efficiently. When the CEO is worried about keeping the doors open, there is no bandwidth left for long-term strategizing. With reduced sales, cash flow and liquidity can easily become problems, but could the reduced sales be caused by irrational pricing or reduced productivity? Much of the time, inaccurate (or non-existent) job costing is often the culprit.
#4: People and Operations
The ability to make money is directly proportional to how well a business attracts and retains skilled people, and this relies on having efficient operations and procedures. Payroll averages 70 percent of service business expenses, so ignoring employees comes at considerable risk! How can staff be assisted? With data, of course, effective reporting makes it easy to identify who is the most (or least) profitable employee. Monitoring this and other data helps build morale, reduce unintended turnover, and much more.
#3: Clients and Services
Clients and the services they buy drive profitability. But it’s critical to dig deeper: Which clients are the most (and least) profitable, and why? Is it the service, are some prices not optimized, or are some teams just more effective than others? Reporting will shine a light on the answers to all of these questions. And don’t forget: Client retention is just as important as retaining the best staff.
#2: Sales and Marketing
Businesses need revenue to survive, so sales and marketing are essential functions. Perhaps even more important, sales and marketing provide leading indicators that can help predict the future. With good data, a CEO will know (and be able to predict) which services are most profitable, sales trends for all services, and where marketing dollars will have the biggest impact. The days of mystery marketing budgets are long gone—now everything can be measured.
#1: Strategy and Planning
Also known as the company scorecard, this is where the management team establishes KPIs, sales goals, and the like. But before these discussions, agreement must be reached on cloud-level statements, such as, what is our purpose? Where are we now, where do we want to be in one year, and how do we get there? With these questions answered, it will be apparent what data is needed to be successful.
How to Get Reliable KPIs
The only reliable way to obtain the data needed to monitor and predict business success is to thoroughly leverage your accounting system. However, this can only (accurately) be done through automation. For example, the majority of small and medium-sized businesses still pay vendors and bill clients using some manual processing. Establishing electronic links with vendors and clients will create many effortless reporting options, in addition to other benefits (fraud prevention!). Useful KPIs include revenue per hour paid, gross revenue, and utilization. Specific KPIs can help drive business success.
To get the best snapshot of company performance at any given time, accrual-based accounting is a must. Cash accounting only works well for simple transactions of low to moderate frequency. For most businesses, this would provide a distorted view of cost, sales, and profit.
With accrual-based accounting, sales are booked when a transaction occurs, rather than when payment is received. Revenue is matched with the costs required to produce a specific product or service, enabling reports to display (for example) job profit instantly and accurately. This method also smooths out skews to the data, such as seasonality.
Once a system is in place to capture KPIs, the data must be analyzed and acted upon. For example, revenue per hour paid (RPHP) shows how much revenue was booked for every hour people were being paid to work. When graphed over time, RPHP can help answer questions like, is productivity going up or down, how does this month compare to the last, and did recent turnover help or hurt the business? Return on labor investment (ROLI) calculates the percentage return received from total company labor. If this is increasing (even after raises, bonuses, incentives, and so on), it might be time to drill down and reward the best employees. If it’s not increasing, drill down some more and determine which teams are the highest performers; then have other groups adopt their techniques.
In the current business environment, data-driven decision-making is essential to survival. Using KPIs—pre-determined, measurable drivers of company success—management can monitor every aspect of performance and quickly hone in on what works, as well as what doesn’t. Obtaining this financial intelligence takes emotion off the table and allows companies to put these numbers to work.