BUSINESS ADVICE • 25 FEBRUARY 2021 • 4 MIN READ

How to identify and measure the key indicators for your business

SECTIONS

Part one – Identify Your Numbers

Part Two – Making Things Better

If you’re in business for long enough, someone will say to you “It’s important to know your numbers”, which is great advice but doesn’t necessarily take your forward, particularly if you’re not a ‘numbers’ person.

So how do you know your numbers?

Part one – Identify Your Numbers

Every business is unique, but all businesses share certain components that are usually critical indicators of success and failure so what are they for yours?

First task – locate the most up to date profit and loss account

If you have a Xero subscription, go into your account, go to the Accounting tab, and click on Profit and Loss. If you don’t, see if you can find it any way or ask someone to help you (Beany would love to help you). Once there, enter the date range, the number of comparative periods (for example, the last four months), then click on Update towards the right.

Once you’re there, you can see the following lines:

Income
Cost of Sales
Operating Expenses
Net Profit (if there are brackets around this, that’s a loss)

This is the basic shape for most businesses. If you have a consulting business, you probably won’t have a cost of sales area.

Take a really good look at the P & L for the last few months and see which figures leap out at you. You will be amazed at how easy it is to see the significant lines and how they are impacting your business.
Make a note of the significant lines for your business:

For hospitality businesses, their cost of sales and wages will be their critical lines
For consulting businesses, their income line and any larger recurring lines such as rent
For tradies, it may be their contractors, or direct costs, or possibly high motor vehicle costs

Pick 3 key lines, for example, income, wage costs and motor vehicle costs and think about those 3 lines in terms of what you can do to make them better. (You can pick more but most of us only have the brain space for a small number of KPI’s. You can always change them when you feel you have mastered these lines).

Now for the fun bit

For each of these 3 lines, think about the most meaningful metric for you. For income, it could be dollars per day, units sold per week, income per month compared to budget, or to last year. What makes you want to do better? What can you watch every day or week to provide motivation to stay with the indicator?

And what can you measure? It has to be something that is easy to count for your time period. Don’t choose a great sounding metric that is a nightmare to routinely track – choose something that your team, or your accounting software can track easily for you.

If all of this seems far too difficult, you can shortcut this by talking to your Beany accountant and they will help you select and measure your KPIs. We have software which talks to your Xero file and can pull out all sorts of metrics.

Part Two – Making Things Better

Part One is the hard bit. Part Two is the payoff.

So many quotes on this “If you can’t measure it, you can’t fix it” “What gets measured, gets done”. In my rather lengthy experience, the moment you start to measure a metric, it starts to improve, like magic. When I first married my husband, he had an exceptionally successful nightclub, with great turnover and reasonable profit. But the gross margin was lower than I expected so I asked the team to count the stock every morning so we could measure the cost of sales daily. The gross margin went up by 10% adding $100,000 to the net profit – and I had done nothing but ask for that one measurement to be taken daily.

That may be an extreme example, but not unexpected.

So look at your 3 KPI’s every day, or week, or month and start to work on them. You know your business better than anyone. You will start to see things you can change to improve your metrics.

Change those things.

Done.

Who are Beany?

We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant world.

We have a dedicated team of certified accountants and a support team to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today.