Business Finance KPI's - tutorial


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Summary presentation on understanding Financial KPIs in small businesses and using business intelligence techniques.

Business Finance KPI's - tutorial

  1. 1. Business  Finance   KPI’s  For  All  -­‐  Tutorial By  Rob  Connell  CEO  of  Smeebi  and  Nathan   Balakrishnan  of  Ten  Forward  Finance  Cer=fied   AccountantsWednesday, February 20, 13
  2. 2. CONTENTS Introduc=on       3 Educa=on       2 Conclusion       5 2Wednesday, February 20, 13
  3. 3. Introduc<on Why  do  businesses  need  KPIs  and  real-­‐<me  analysis? If  you  were  to  believe  everything  you  read,  it  is  both  the  best  and  the  worst  =me  to  go  into  business.   The  pressures  on  small  businesses  has  never  been  greater. According  to  sta=s=cs  published  by  the  Small  Business  Administra=on  (SBA),  seven  out  of  ten  new   employer  establishments  survive  at  least  two  years  and  51  %  survive  at  least  five  years.  The  key   reason  they  give  for  failure  is  mismanagement. “Over  the  years  Ten  Forward  Finance  have  had  many  clients  approach    us  for  assistance  with  a  failing   business.  In  truth  the  majority  of  the  issues  they  experience  turn  out  to  be  due  to  poor    financial   management.  However  ,  we  also  see  another  worrying  trend;  the  lack  of  easy  to  understand  ‘Real-­‐ Time’  informaHon”    Nathan  Balakrishnan  TFF  Too  many  business  owners  spend  hours   pouring  over  mul=ple  spreadsheets,  P&L  reports   and  calcula=ons  with  liQle  end  product.    Whilst  there  are  many  different  aspects  to   this  problem,  one  issue  we  will  look  at  in  detail   is  the  use  of  Key  Performance  Indicators.Wednesday, February 20, 13
  4. 4. Vital  Informa<on KPIs  provide  small  business  owners  with  an  immediate  snapshot  of  the  overall  performance  of  their   business.  In  today’s  compe==ve  business  environment,  it  becomes  highly  important  for  the  owner  to   have  real-­‐=me  data  concerning  the  health  of  his  business.  The  small  business  owner  should  measure   and  track  the  key  performance  indicators  crucial  to  the  success  of  his  organiza=on.  These  important   KPIs  provide  vital  decision-­‐making  informa=on. Educa<on The  act  of  measuring  KPI  promotes  an  atmosphere  of   learning  in  an  organiza=on.  According  to  Root  Cause,  the   data  generated  from  measuring  key  performance   indicators  fosters  cri=cal  conversa=ons.  These  discussions   educate  all  personnel  involved. KPI  Defini<on:  Key  Performance  Indicators  (KPIs)  can  be  defined  as  measures  that  provide   managers  with  the  most  important  performance  informaHon  to  enable  them  to   understand  the  performance  level  of  the  organisaHon.    KPIs  should  clearly  link  to  the  strategic  objecHves  of  the  organisaHon  and   therefore  help  monitor  the  execuHon  of  the  business  strategy.Wednesday, February 20, 13
  5. 5. Considera<ons KPIs  have  a  certain  level  of  importance  in  an  organiza=on,  but  only  if  the  KPI  leads  to  acHonable  steps   to  achieve  a  goal.   For  example,  a  company  that  establishes  a  KPI  to  increase  customer  reten=on  does  not  have  a  chance   of  reaching  this  goal.  The  goal  does  not  have  a  measurable  component  that  results  in  ac=onable   steps. If  the  company  revises  the  KPI  to  increase  customer  reten=on  by  10  percent,  it  now  has  a  measurable,   quan=fiable  goal.   The  company  must  convert  the  measured,  quan=fied  data  into  ac=onable  items  to  meet  its  goal.   Here  are  some  examples  of  the  type  of  KPI’s  that  you  may  find  useful:  Improvement  in  Profitability  Improvement  in  Revenue  growth  Improvement  in  net-­‐new  customers  gained  Improvement  in  customer  sa=sfac=onWednesday, February 20, 13
  6. 6. What  do  you  want  from  your  business? These  are  very  important  measures,  but  we  have  o]en  found  that  the  key  strategies  of  many  business   owners  can  be  a  lot  more  fundamental.  Typical  ques=ons  to  ask  are:  Are  you  just  star=ng  out,  have  you  been  running  your  business  for  a  few  years?  Are  you  looking  to  sell?  Would  you  like  more  free  =me?  Do  you  want  to  generate  enough  free  cash  so  you  can  be  mortgage  free  in  3  years? These  are  all  key  business  objec=ves.  Whether  we  realise  it  or  not,  in  order  to  achieve  them  we  need   to  set  very  clear  and  measurable  target  KPI’s.  Let’s  look  at  some  examples  of  the  goals  that  you  might   want  to  set  and  therefore  the  KPI’s  that  you  may  need  to  measure: Growth  Company  Ltd   A  company  in  its  second  year.  Their  goal:  Cashflow  for  growth  and   Owners  wealth  crea=on.  Started  with  capital  and  loans  from  its   two  owners.  Company  that  has  two  lines  of  income:  So]ware  that  is  has  the  a  license  to  distribute  Consultancy  fees  for  specialist  advisors  to  install,  train         and  follow  up  on  installa=on  of  so]wareWednesday, February 20, 13
  7. 7.   Growth  Company  Ltd  has  two  clear  goals  Generate  funds  to  re-­‐invest  in  further  so]ware  and  training.  Owners  want  to  withdraw  further  funds  by  year  3  –  pay  off  those  mortgages. So,  where  are  the  problems? Let’s  take  a  look  at  revenue;  revenue  is  increasing  but  look  at  Gross  Margins  for  period midway  through  2011.  Whilst  revenues  dropped  for  consultancy,  the  revenue  for  so]ware sales  increased.  However  the  margins  reduced  dras=cally  –  squeezing  profits  and  cash.  Why?   Issue:  Gross  margin Drilling  down  into  GM  and  Revenue  and   COGS,  it    turns  out  the  terms  with  the   so]ware  license  company  weren’t  as  good   KPI’s  for  these  goals: as  was  first  thought. Solu<on:  Debtor  Days Look  for  ways  to  improve  the  margin:    P&L  a]er  tax Increase  consultancy  work.  They  have   approached  a  similar  so]ware  reseller  with  a    Gross  Margin beQer  deal.  They  will  now  need  to  analyse  this    Revenue later  on.  So,  gross  margin  becomes  an   important  KPI.  The  monthly  target  will  be  35%.  Current  Ra=oWednesday, February 20, 13
  8. 8. Issue:  Cash  at  BankBank  Balance  and  Debtor  DaysView  screen  showing  various  related  KPI’s.  Cash  at  bank.  Debtor  Days  -­‐  the  =me  it  takes  for  customers  to  pay.  It  turns  out  this  business  has  not  been  par=cularly  good  at  chasing  its  debtors.  They  have  strict  terms  with  its  consultants  and  so]ware  licensor,  all  of  whom  they  have  to  pay  within  21  days.  But  their  customers  can  take  up  to  3  or  4  months. Solu<on: Employed  a  credit  controller  and  tasked  them  to  reduce  debtor   days.  They  have  a  basic  wage  and  a  bonus  =ed  to  the  debtor  days   result  for  each  quarter.  The  business  will  be  able  to  use  the  cash  to   re-­‐invest  in  either  new  so]ware,  key  skills  or  for  the  owners  to  take   out  some  large  bonuses  .  For  this  they  will  par=cularly  want  to  keep   an  eye  on  P&L  a]er  tax  and  Reserves  Available  -­‐  Funds  available  for   distribu=on.  Of  course  as  we  o]en  learn  –  the  rela=onship  between   profit  and  cash  at  bank  is  o]en  tenuous.  The  amount  of  =mes  I’ve   heard  clients  remark  “where  has  all  that  gone?”  when  they  see  the   boQom  line  of  profit  for  the  year.Wednesday, February 20, 13
  9. 9. Growth  Company  Ltd  financial  ra<os Growth  Company  Ltd Current  Ra=o  has  been  gradually  declining.  Obviously  a  symptom  of  some  of  the  other  issues  noted  above.   However,  if  the  business  is  looking  for  finance  and  the  bank  has  indicated  that  it  needs  to  see  a  Current  Ra=o  of     at  least  3,  then  this  would  be  a  minimum  target  to  set. We  all  know  how  hard  it  is  to  get  any  sort  of  lending   One  of  the  most  important  and  oldest  financial  ra=os  that   banks  and  lending  ins=tu=ons  use  when  assessing  a   poten=al  client  is  the  Current  Ra<o.  Being  able  to  quickly   and  consistently  monitor  such  a  ra=o  is  invaluable  for  many   of  our  clients  who  are  regularly  looking  at  op=ons  –   financing  equipment,  short  term  overdra]s. What  is  Current  Ra<o? A  liquidity  raHo  that  measures  a   companys  ability  to  pay  short-­‐term   obligaHons.  Also  known  as  liquidity   raHo,  cash  asset  raHo  and  cash  raHo.   The  Current  RaHo  formula  is  Current   RaHo  =  (current  assets  /  current   liabiliHes).  Typically  a  raHo  of  between   1.5  and  3  indicates  a  healthy  business  at   least  for  the  short  term.Wednesday, February 20, 13
  10. 10. So  how  can  Smeebi  help  Growth  Company  Ltd? We’ve  iden=fied  some  clear  issues  and  some  targets  ,  and  we  can  now  pro-­‐ac=vely  use   Smeebi  to  track  KPI’s….  Smeebi  can  help  business  owners  to  analyse  their  finances  in  a   way  that  is  produc<ve,  prac<cal  and  easy Budgets  for  next  quarters  and  next   year What  are  the  KPI’S  for  the  next  quarters?  Need  to  improve  on  Debtor  days;  Target   of  45.  Improve  Gross  Margin  (introduce  new   op=on  of    so]ware)  35%  Monitor  Current  Ra=o  –  min  3  Increase  reserves  by  X.Wednesday, February 20, 13
  11. 11. Conclusion We’ve  been  able  to  see  that  KPI’s  are  important.  As  well  as  historical  analysis   Smeebi  also  has  a  neat  budget  tool  that  allows  planning  to  see  impact  on  KPIs.   Here  are  the  key  messages:  Keep  it  Simple  –  3  or  4  KPI’S  Be  clear  about  end  goals/objec=ves  Set  aQainable  and  realis=c  Goals Examples  of  KPI’s  to  monitor  and  react  to:  Ensure  they  can  be  accurately  measured Revenue Your  cri=cal  income  from   sales.  Set  aside  regular  =me  to  analyse Debtor  Days   How  this  impacts  cash  flow. Profit/Loss Retained  earnings  for   dividends  and  reinves=ng. Acid  Test  &   Will  you  meet  your   Current  Ra<o obliga=ons? Gross  Margin How’s  your  cost  control  and   pricing?Wednesday, February 20, 13
  12. 12. About  Smeebi Smeebi  started  life  in  2011  in  Finland,  a]er  its  founders  recognised  a  genuine  need  for  a   business  intelligence  solu=on  designed  specifically  for  small  and  medium  sized  businesses.   Their  vision  is  to  develop  a  powerful,  yet,  user  friendly  solu=on  for  SME’s.  Unlike  most   other  enterprise  BI  products  on  offer,  Smeebi  has  been  created  around  an  affordable   subscrip=on  based  model,  simply  ready-­‐to-­‐go  online.   Smeebi  are  passionate  about  empowering  SME’s  with  a  beQer  understanding  of  their  data,   and  remain  focused  on  developing  solu=ons  that  solve  some  of  the  key  challenges  that   small  businesses  face;  saving  =me,  keeping  track  of  what’s  going  on,  and  ul=mately,   making  beQer  informed  decisions.     Feel  free  to  follow  us  or  contribute  to  these  discussions:     To  read  the  latest  BI  news  and  product  updates  please  visit  our  blog  on blogWednesday, February 20, 13