Monitoring your business performance
A bakery and a shoe shop cannot have the same measure of performance, right?
Even two bakeries would have differing measures of performance, given their stage in business and other factors. So then, how do you measure your business performance?
Business performance is measured by calculating and monitoring certain metrics. The metrics for your business must be relevant to your business and can be compared to a business like yours. There are so many things to consider when measuring performance and we simplify these for you.
Profit
You are in business to make a profit, right? So naturally, you should ask your accountant for these figures in your business and keep track of them monthly or quarterly.
Gross profit %
Gross profit is what is left over after you have paid all your costs for making the sale. If you are manufacturing products or in retail, lately, even some service-based businesses are looking at gross profit.
For example, if you make R100 sale and it costs you R50 (in raw materials and labour) to make that R100, then your gross profit margin is 50%. You will then use the remaining R50 to spend on other business expenses like rent, advertising, admin salaries, etc.
It is critical that your gross profit is as high as possible, by increasing revenue, while keeping costs to make that revenue as low as possible.
Net profit %
Net profit is what is left after you have paid all your expenses and taxes. This is calculated by deducting all other administrative expenses from the gross profit and expressing it as a percentage of sales.
If we take the R50 we were left with above, and pay R20 in salaries, R5 for advertising, R12 for rent and R2.80 for taxes, then the net profit would be R10.20
As a percentage, net profit would be 10.20%
Liquidity
Cash is king and therefore, liquidity ratios are the most important ratios to know in your business. Your business could be making profits and may not have the cash to pay for anything.
Liquidity allows you to take advantage of supplier discounts when buying in bulk, help you maintain your payments when a customer delays with payment or even help carry your business when sales are a bit slow.
Current ratio
The current ratio helps you know if your business is able to pay off its current debts (payable within one year) with its total current assets such as cash, amounts receivable from customers, and inventories.
Having said that, each business is different and so is yours. This ratio will be dependent on industry you’re running your business in as well as the stage of business you’re in.
Receivable days
This metric will show you how long it takes for your customers to pay you. You only need to know this if you sell on credit. If your business is cash based, then the number of receivable days will be zero.
Solvency
When your business can pay long term loans, it means that your business is solvent. So basically, if you minus what your business owns from what your business owes, you should have a positive balance which basically the money that you are entitled to as the owner.
It is a bit more complicated, but this check is done by banks and other lending institutions, when you apply for finance. So, as a business owner, you must know if your business is solvent.
Non-financial metrics
New business
If your business isn’t growing, it’s a problem. Having a constant stream of new clients/customers is essential to maintaining sales and inviting growth.
Two ways of knowing how effective your sales and marketing is doing are:
Number of new leads – gives you an indication of how well your marketing efforts are performing. If you have a steady stream of new leads (potential customers that have the problem you are solving), then you know your marketing efforts are yielding results.
Each business will have different ways of measuring “new leads”, but nonetheless, it is important to know how many people are genuinely interested in buying your product or service.
Number of new sales – tells you how well you have converted your leads into paying customers. You should know the rate at which you convert leads into sales. If you are not converting your leads into sales, you need to know the reason for that.
You may or may not need to make changes to how you approach your leads to make a compelling reason for them to buy from you.
Efficiency
Overtime
Time is money and you pay for your employees for their time in return for the work they do for you. So, when your overtime costs are rising, you need to investigate why that might be the cause. Keeping overheads low is important to any business’s profitability.
Customer satisfaction
It costs you more than money when your customers are not happy. So you must have some way of measuring how your customers feel after they have bought your product or received a service from you. By reviewing their responses, you will know if you’re keeping them happy or not.
Urgent attention needs to be given to those customers who are not happy to resolve their problem. Happy customers will often do their own marketing for you and unhappy customers can sour how current customers feel about your product or service as well.
How can we help?
There are many more metrics that you, as a business owner should keep track of. But you don’t need to keep track of these on your own. We are here to help!
When you work with us, you get to understand how your business is performing and ask questions.
We give you advice based on your business’s specific stage. We have tailor made packages to suit every stage and we’re excited to get to work with you on your business!
Get in touch with us by sending an email to hello@santosbiz.co.za or Book a Call with us now.
