1. Directors’ Briefing Strategy
Running any business effectively requires 1.2 Most indicators are used to monitor and
good decision-making, which is based on control the profitability and cashflow of the
good management information. business.
All businesses need to monitor profitability • The three key areas are sales (see 2), costs
and cashflow carefully, and use management (see 3) and working capital (see 4).
accounts for this purpose.
Any trends towards cashflow problems or
But to boost profitability and cashflow you falling profitability will quickly show up in
also need to understand and monitor the key these figures.
‘drivers’ of your business. A driver is something
which has a major impact on the performance 1.3 Some indicators are used as part of a
of the business. strategy to boost profitability and cashflow.
This briefing outlines: • These are the drivers of the business, and
they can be used to powerful effect (see 5
• How to choose key performance indicators. and 6).
• The three vital areas to monitor: sales,
costs and working capital. 1.4 Compare the past, present and future.
• How to identify key drivers for
• How to present the information.
1 Selecting information
There is a multitude of internal and external
factors affecting the performance of every
business. The sheer volume of information
available to management can be a distraction.
1.1 You need to focus on a handful of key
• Reflect the performance and progress of
• Are measurable.
• Can be compared to a standard, such as
a budget or last year’s figures.
• Can be acted upon.
England Reviewed 01/12/08
2. Directors’ Briefing 2
• Figures for last year and last month provide A six-month orderbook means that you
hard facts and established patterns. could survive for six months without making
• Figures in budgets and forecasts help another sale.
you to identify potential problems and
opportunities early on. 2.3 When reviewing sales, monitor the figures
The figures must be calculated on a that show what is happening:
• Which categories of product are selling well?
1.5 Compare yourself with other businesses, How are your priority products (those with
especially competitors, if possible. the best margins and the best payment
• What has each salesperson achieved?
2 Sales • Are your conversion rates (the ratio of leads
to sales) changing?
2.1 Enquiry levels (or number of leads, or
quotes given) provide early warning of any Enquiries, orderbook and sales progress should
peaks or troughs in your sales. be reviewed by the sales team every week. At
board level, they should be reviewed monthly.
• Monitor where the enquiries come from, to
establish which marketing campaigns work.
• If you have an established enquiry to sales 3 Costs
ratio, and know the size of an average sale,
you can use the enquiry level to forecast Like sales, your costs (and therefore profit
turnover. margins) should ideally be tracked every week.
Many retailers are able to track them daily.
2.2 Building up the orderbook is a key
objective of most businesses. Identify the key variable costs (eg materials),
and what causes them to increase or decrease.
• The ‘orderbook cover’ figure compares the
total value of your orderbook to breakeven 3.1 Maintaining a healthy gross profit margin
sales for one month. is critically important.
• Falling margins could result from any
number of things eg higher input prices,
The signs were there product mix, production inefficiencies and
A sign manufacturer won a large order to
make, deliver and install signs for a retail 3.2 Group different types of cost into cost
chain with branches throughout Europe. centres.
Everyone worked frantically to fulfil the order. • For example, a warehousing and delivery
business could split its direct costs into
The directors did not notice the falling profit warehousing and delivery. Matching the
margins, which resulted from the optimistic costs against the revenue for each half of
pricing of the delivery and installation the business would show how profitable
elements of the contract (neither of which each operation is.
they had previous experience of). • Related overhead items (eg phone charges,
postage and stationery) can be lumped
Nor, until the crisis stage, did they properly together into one combined cost figure.
think through the cashflow implications.
They were used to being paid promptly, 4 Working capital
thirty days after a sign left the factory gate.
Now they had to wait until each sign was Cash generation is a major priority for most
delivered, installed and inspected before they businesses. You control cash by controlling
could even invoice for it. working capital — debtors, creditors, stock
Had the company used effective
management information systems, they could 4.1 Establish how much extra working capital
have anticipated the problems that arose. is required to fund each extra ten per cent
increase in monthly sales.
3. Directors’ Briefing 3
• If sufficient finance is not available, you may 5.1 A management consultancy had a
need to delay (or reject) large orders. disappointing level of monthly sales for
years, until it realised that man-hours sold
4.2 An effective way to control debtors and per consultant per week was the key driver.
creditors is to produce an ‘aged’ list of
debtors and creditors, every week. • Once this was monitored, it became crystal
clear which consultants were earning the
• Any customer payments which are revenue. Attitudes changed overnight, and
overdue, suspect, or simply large, should sales increased significantly.
be highlighted and tracked.
5.2 After a period of stability and high profits, a
4.3 Good stock control allows you to specialist travel agency realised that staff
release cash, while still having the correct turnover was a driver.
• An experienced sales person was found
• ‘Stock turn’ is the ratio of cost-of-sales to to be three times more productive than a
stock. If the figure decreases, find out why. new recruit.
For example, you may be purchasing stock • The recruitment and training process for
which you cannot sell. new sales people was a major burden.
• The more you break down the stock figure To reduce staff turnover, the travel agency
into separate product categories, the easier introduced a long-term incentive element
it is to see where the problems are. into remuneration packages. It also
introduced quarterly performance reviews. If, like a
Cashflow (and credit control) should be management
reviewed every week. If this is a problem area, 5.3 An engineering company found that the consultancy, your
the review should be daily. defect ratio was a driver. revenue is based
• Defects led to goods being returned, billed, do not
5 The power of drivers extra work to rectify the faults, delays in put consultants’
payment, and lower prices being achieved. salaries in
Monitoring your sales, for example, will overheads. Put
not necessarily help you improve your The company reorganised the workforce to them in ‘cost of
sales performance. work in ‘quality cells’, and stopped using a sales’, to show the
machine which was unreliable. Productivity true gross profit
By contrast, understanding the drivers
behind the sales of your business can provide
5.4 Drivers vary enormously. For example:
The simplest way to explain drivers is by using • Sales leads in a capital goods business.
examples, such as those below. • Sales per square foot in a retail business.
• Market share in a market where only the
Eye on the ball big will survive.
• Machine downtime in a factory.
Always come back to what drives your • ‘First time fix’ in a maintenance business.
business. Take the example of • The morale of employees in a nursing
a housebuilder. home.
The profitability and cashflow of Even direct competitors use different drivers
housebuilders is greatly affected by housing to improve their business performance. For
prices and sales activity levels in that example, prime location is not a key driver The first step in
market. These, in turn, are affected by local for hi-fi retailer Richer Sounds, but it is for its closely managing
demand and supply, and interest rates. competitor, Comet. a business is to
But it is all too easy for a housebuilder to with a range
ignore these key drivers. There will always 6 Identifying your key drivers of appropriate,
be sites which are running over budget, and accurate and timely
Suddenly, the housebuilder may find that
while he was busy building houses, the
What are the key factors which enable your
business to outperform its competitors?
The questions you need to ask yourself are:
market for them has collapsed. What drives the sales figures? What drives the
costs? What drives the cashflow?