Unless you measure business performance, there is no way of telling whether your business requires attention. In order to improve profitability against your goals and benchmarks, you need to measure it against past results. This is done by measuring the current position, setting the target and measuring the process of the target.
Start on measuring business performance
Keep accounts up to date
If your business is entering data at the end of the month or quarter, your reports can potentially be up to three months out of date. The only way you can make informed decisions on your business is if your accounts are constantly up to date.
Know what to measure
There is no point having your accounts up to date if you’re unsure of what to measure. Running a profit and loss statement and balance sheet is a good starting point but there are many other reports that you can utilise. More detailed reports on your ledger may provide the ability to drill down into key data to provide information of the actual performance of the business in key areas. These include cash flow and aged debtors/creditors reports.
Measure inputs and outputs
Remember, your reports won’t have the answer for everything! You may want to measure the drivers of your business. These will vary depending on the industry you work in but may include website hits, percentage of enquiries converted to sake or a measure of repeat business. Your business may want to measure customer satisfaction by way of feedback mechanisms which will help you make better informed decisions on how to improve your business’ product or service.
Compare against benchmarks
Comparison benchmarks are a great help when it comes to interpreting any of your reports. Certain industry benchmarks are available from the ATO website. The most common measurements are a previous period, a budget and a comparison of a normal performance like yours.
Look at ratios
By monitoring a few simple ratios, you will gain a great insight into your business. For example, rather than just reviewing gross profit as a dollar value, track your gross profit percentage. You can do this for all income and expenses. Using a ratio makes it much easier to spot trends and to compare against a benchmark.
Interpret the results
Using all the tools will help you interpret the results in your business. If you’re unsure you may want to seek advice from an accountant. You want to make sure the results mean something to you and aren’t merely ‘just numbers.’
Take action on the results
You are now in a position to act on the results in your business- both the good and the bad. The information will enable you to make good decision making and change the results of your business for the better.
Being able to set better goals from measuring business activity should be one of your main priorities as a business owner. If you would like advice as to how to measure the performance of your business, contact the accountants at The Quinn Group. Call us on 02 9223 9166 or submit an online enquiry at www.quinns.com.au