On one of our Tuesday Talks, we sat down to talk about the journey and evolution of a start-up to a scale-up.
Something that kept coming up was the concept of measuring your metrics.
Now, that concept probably does not come to a shock to you, measuring metrics, KPI’s and ROI’s is a fundamental part of business; however, the key thing that is sometimes overlooked is the type of metrics you are measuring.
Not all metrics are as equally impactful. Depending on where you are at within your business, and your business goals which will determine what metrics will work for you.
Do you have staff?
Does your business work with stock?
What systems do you have in place to take payment?
There are many factors, so with that in mind, we wanted to share some of the core metrics that we recommend measuring.
One thing that we tend to recommend as a standard with our management reports is to monitor your operating profit.
Your operating profit is your bottom line, how profitable the business is.
You can find the information for this on your profit and loss statement.
Here is a quick way to work it out:
Turnover - expenses = Profit - Tax = Your actual profit.
This formula is a basic but effective way of quickly looking at a glance how profitable your business is.
The overall goal, of course, is that it is taking in more than what is flowing out.
When you have cloud accounting software such as Xero, this is done for you, and you can log in at any time to get an overview.
2. INVENTORY DAYS
How long on average is your product taking to sell? You need to know when your re-order points are.
Finding that sweet spot between ordering enough to stay/ meet demands but not too much where you have stock ‘sitting’ and not getting moved. Talk to your accountant about how to better this based on your specific business model.
Here’s a way to work out your inventory days:
Period, e.g. a year, divide by cost of sales (how much it costs you to sell that item) x by Inventory amount (Inventory value).
The fewer days there are, then the more positive cash flow that is available.
This metric helps you get an indication of action steps to up-level, scale and grow your business. It can also be helpful to discover the leaks. Do you need to look at your advertising? Do you need to look at your ROI’s on your ads, Facebook campaigns, blogger collaborations?
You can look at your buying process, look at the seasons, look at whether you are overbuying, look at the styles and so on.
3. STAFF TO TURNOVER
Staff to turnover is another great one to track.
Not to be confused with staff turnover, which is more about how long a staff member stays with you.
Staff to turnover is how much of you total turnover is being spent on staffing costs.
Typically this is just staff salaries and does not include the business owners, but if you are interested in this metric too, then you could do two separate recordings, with one that includes the owner(s) and one without.
4. DEBTOR DAYS
Another core metric to track is debtor days which is essentially how long on average it takes for you to be paid by your clients/customers.
Ideally, you want this to be no more than 30 days. However, there are sometimes other factors to consider, such as if you work with a larger company that has longer payment terms.
But as a rule, you want to minimise this. The information you get from this could be the catalyst for looking at the systems and payment gateways you use to get paid.
Of course, getting paid faster is something that most people are aiming for, and there are many ways you can improve this, for example using tools such as GoCardless or accounting software add on apps that chase the payment with friendly automated messages.
So there you have it! Those are the core metrics that we suggest you track at a basic level.
Of course, if some of these metrics do not apply to you and your business, you can skip it, or if it is something like staff to turnover and your growth plans include hiring then, it gives you something to work towards and be aware of if recruitment is on your road map.
So what next? Where do we go from here?
If you want something more complex, you can talk to your accountant about management reports. If you are an existing client of ours, then reach out to your dedicated Client Manager, but if you are not a client and want to talk about working with us, then you can book a discovery call here.
This is something where we sit down with you, your business and map out and track core metrics tailored to your business and provide easy to read reporting based on those needs.
But at a basic level, getting a good, cloud accounting software, such as Xero can be very helpful to get this at a glance.
Follow us on Instagram to hear about the latest topics and information.