Know your numbers!
The problem with using generic Key Performance Indicators (or KPIs for short) is that all businesses are different. So the numbers that we need to understand to make better informed business decisions are different. The trick in optimizing the potential of cloud accounting reporting is in choosing which figures to look at. A good management accountant will make sure that you are basing your decisions on the correct set of figures, not on the wrong ones.
The next part of this is to watch those figures, and see what they do, each week, every week. There is no point only looking at them every 6 months. Success in business is often to do with how you react to events. Your red widget sales have fallen this week, for the first time in the past year. A week you may put down to a blip. But the next week, the sales have fallen again. Because you have observed this trend, you look around in your marketplace and discover that your competitor has lowered their prices to undercut you. Armed with this knowledge you can decide. Should you:
- price-challenge him and reduce your price as well?
- increase your customer service and move away from the bottom of the market?
- reduce your cost, whilst maintaining your price, thereby increasing your profit to offset your fall in sales?
- increase your prices to make more money per sale, to negate the loss in sales volume?
If you only looked at your figures once every 6 months, the steps you would need to take to recover the lost red widget market would be greater. So that not only would you have lost more money by your lack of action, but, when you do act, the cost will be greater. Monitoring your KPIs consistently arms you with the knowledge that you need to excel in your marketplace.
Your management accountant will ensure that you are monitoring the right numbers, at the right intervals. They will also help you to avoid various common pitfalls, that may trip up your competitors.
One of the classic mistakes new business owners make is not knowing the profitability of each of your products or services. Without this information the basic sales figures are reduced in their usefulness. Let’s say that you have a high profit margin on silver widgets, and a low profit margin on black widgets. Your two salesmen report in at the end of the week. One, let us call him Bob, has sold 100 black widgets, but only 5 silver widgets. The other one, Bill, has sold 10 black widgets, but 50 silver widgets. If you don’t understand the profitability of these two products, you will think that Bob, who has sold the greatest number of widgets in total has done better, whereas, in fact Bill, who sold fewer widgets in total, will have earned your business more money.
Another pitfall is undervaluing yourself and your time. Never underestimate your time. There is no way to generate more time, we are stuck with 24 hours in a day, and you cannot spend all of those working! So, it is vital that you value your time, and charge it accordingly. Equally, value the hours produced by your staff correctly. There are only so many hours of productivity your staff can create. Often simply getting them to work longer hours won’t result in more output, but rather a reduction in productivity. Evaluate the efficiency and effectiveness of yourself and your workforce.
Lastly check the price of everything, and review, review, review. So, six months ago you were getting the best steel price from your supplier, but what about today? Unless you check you don’t know if you are getting the best price. Saying “oh but we always get it from them,” won’t improve your profit margin. Keep an eye on your controllable costs for example utilities or insurance. We know that we should check our home energy costs regularly to save money, but do we remember to do the same in our businesses? Always consider raising your prices. Remember fewer sales at a higher price, may generate more profit for less administrative work!
Once you are working with a management accountant, regularly reviewing these figures will be a simple task. The time spent on this weekly or monthly review will easily generate a good return. Decision making with a management accountant will alleviate the pressure on you, allowing you to make continuous small changes which over time will lead to a large difference on your bottom line.