These techniques are performed in a clockwise motion beginning with developing performance metrics. Each step provides management with feedback to improve the previous process. When the techniques are implemented in a continuous cycle, business net worth will increase over time. Create measurement techniques to define targets reviewed by management,Develop process improvement techniques to assess against performance metrics,Implement effective management review techniques used to modify processes.
Definitions for common metric tools:Profitability – measures an organizations effectiveness at generating revenue to cover its cost and provide a return to owners.Activity – measures how effectively the firm is using its assets.Liquidity – solvency – measures the firms ability to meet its short term obligationsDebt or leverage ratio’s – used to predict long term solvency of organization.
This is an example of an activity ratio. Businesses that carry accounts receivable can measure the rate of collection and improve cash flow by analyzing this metric. In this scenario, it takes over 90 days to collect on A/R.
In comparison, by reducing the average A/R, cash flow has been reduced from 91.25 days to 22.8 days. Similarly, if the desired metric is to collect A/R in 45 days, for example, you would plug in 45 days as the end result (replacing 22.8) and work the formula backwards to calculate the new “average net A/R” balance, then manage the collection efforts to that number.
Tracking key performance indicators on a monthly basis using an Excel spreadsheet and comparing actual results against external and internal targets allows management to focus its efforts on improving the bottom line. Descriptions for some important KPI’s: Gross margin higher than competition provides competitive advantageCurrent ratio should be greater than 1, inventory is less liquid, high ratio could mean excess cash; ratio’sused by ST and LT creditorsReturn on Capital Employed – measures the ability to use investment effectively and is central to long term development. Essential component for strategic planning initiatives.
Consider KPI’s during strategic planning initiatives.
Customer contribution is an important metric to track. Knowing this information determines how much you can spend to keep an existing customer and how much to spend on a new customer.
A simple illustration of the billing process. The goal is to reduce risk of lost revenue and ensure proper revenue recognition procedures are established. Examples of key controls include:Matching numerically sequenced packing lists to invoices to ensure all shipments are billed to customers.Review accounts receivable aging reports to ensure collections are received within established parameters.Establish and review customer credit limit thresholds; develop a relationship between sales/order entry and accounting/administrative record keeping personnel to monitor existing credit limit amounts; and set-up automated alerts to indicate when a customer credit limit is exceeded.
These are examples of improvements for the customer billing process. Once the performance metrics are established and the process has been analyzed for control gaps, management can take actions to improve the process by developing internal controls.
Determine the framework and criteria for documenting controls. Analyze risk by asking “What could go wrong” with the process.
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3Power Techniques to Increase Business Net Worth<br />Campanelli & Associates CPA LLC<br />
Selecting Meaningful KPI’s<br />How to determine which KPI’s to measure:<br />Is the control information key to the success of the organization?<br />Can the data be measured?<br />Can the established performance metric be influenced?<br />Does the information provide leading edge indications of future developments?<br />Campanelli & Associates CPA LLC<br />
Calculating Customer Contribution<br />Lifetime Value of the Customer<br />Average Transaction Size<br />Average Client Fees Per Year<br />Number of Customer Per Day<br />Total Revenue of the Day<br />Capture Customer Information<br />Names, Addresses, Birthday<br />Campanelli & Associates CPA LLC<br />