The key points on Key Performance Indicators
Robin Tidd wrote a very concise article in Accountancy Plus recently (see the December 2010 issue here) on the subject of key performance indicators (KPI) in a business. According to Tidd, while around 90% of Fortune 500 companies utilise tools like the Balanced Scorecard to report on KPI, 70% are not happy with their reports. Tidd, rightly points out that this is not a problem with the tools used – such as a Balanced Scorecard – but more likely the application of the tools. He makes a few key points which I summarise below.
1. Don’t mix up KPI with key reporting indicators.
The best example of this is profit, which is a result or outcome.
Of course these results are essential, but tell nothing about what
caused the result. For example, have profits increased due to
improved productivity or customer satisfaction.
2. Use maps of your organisations processes to help find the best KPI.
3. Be careful to look at all processes and not just departmental ones. This avoids choosing KPI which may be sub-optimal.
4. Compare KPI on a regular basis, keeping the reporting interval short. This allows for faster corrective action.
5. Use the KPI on the front-line on a regular and routine basis. This fosters continuous improvement in all processes.
You can read the full article here http://is.gd/jLEn2
Controlling your cash flow
I’m in holidays at the moment, so I am taking a short cut by referring to another blog! SmallBusinessCan is a website set up by an Irish bank and other sponsors to help small business by giving practical advice through its network of users and sponsors and through regular postings. Here is a recent post from the websites blog. Controlling your cash flow provides 15 suggestions to help control your cash flow.
Determining the value of your business: recasting the income statement
Valuing your business is something you’ll need to do if you’re about to sell it off. There are several ways to value a business, but the most reliable methods are based on cash-flows rather than profits. Here’s a piece from the You’re the Boss blog in the NY Times which gives a good example of one cash flow based method. The method uses the income statement/profit & loss account as a starting point to work out what’s often termed the owners’ cash flow. This is turn is`often combined with a multiplier (e.g. a number of years) to derive a value for a business.
(In-)Corporate(d) Social Responsibility
Corporate social responsibility (CSR) is a term used to describe how a business sees its responsibilities towards things like its workers, the environment, the community, customers and so on. If you look on the website of most large businesses, or in their annual reports, you’ll find something about the how the business operates in a responsible manner. Many such businesses have a separate CSR manager who reports directly to the board of directors. Mike Brooks writes in the June (2010) edition of Financial Management how some companies don’t adopt this approach, but instead have CSR embedded throughout the company. A big advantage of having CSR embedded throughout a business is that projects or plans need not be evaluated separately from a CSR perspective. Instead, being a socially responsible organisation is embedded in all roles and business processes. This method, according to Brooks, moves CSR away from a once a year mention in the annual report to something that’s hard-wired into the organisation.6 traits of successful small businesses
Here’s a recent article from Inc. magazine on some research which tries to identify the characteristics of successful small business.
Guardian Life Report Identifies Six Traits of Successful Small Businesses.
Don’t loose sight of profits and cash flows – how Lego revived its outlook
The Danish toy company Lego, has had to do a bit of re-building of late, according to Time (June 7th, 2010). Lego has been around since 1932 and has given many generations endless hours of fun (or peace if your a parent!). The product was created by an unemployed Danish carpenter (Ole Kirk Christiansen) and he patented it in 1958. Today, as anyone with kids knows, there are so many high-tech toys that compete with traditional toys like Lego, which has education and learning at its heart. This in fact was one of the contributors to Lego making large losses (e.g. $450 million in 2004) – focusing too much on the educational value of its 14,000 unique stock items. In 2004, a new CEO Jorgen Knudstorp, took the helm. He quickly reinvigorated the company by not forgetting one of the basic lessons of accounting and managing a business – the bottom line counts. There were lay-offs, plant closures and new licensing deals (Star Wars, Harry Potter for example) and some efforts to adapt the product to the digital age e.g. an online website where children can design their own creation and order a physical copy. The result – profits were $440 million in 2009. So don’t forget, now matter how good your product or service is, it can only survive if the bottom line is positive and generating cash!Risk in business
Any business faces risks at some time or another. Some may be easy to avoid or foresee, and thus measures can be taken to avoid or reduce them. Student Accountant (the ACCA’s student magazine) of June 16th last includes a feature on the recent volcanic ash cloud take caused chaos over European airspace on April this year. It might be something the airlines had not really thought about before now, but you can bet they now include disruption from volcanic ash in their assessment of business risk. The estimated losses from the disruption are in excess of $1bn – not exactly what the already recession hit airline sector needed. Can all business risks be eliminated ? Of course not, but businesses can try to minimise or reduce risks. As mentioned in the article, a four point TARA model can be used to assess risk:
No Accounting for startups?
While having a regular look on inc.com, I found this interesting blog post from Steve Blank’s blog. He writes that financial statements are not the best thing to use to monitor a start-up business. Sometimes banks or venture capitalists insist on things like regular income statements and balance sheets. While I don’t think it’s right to say “no accounting”, there is a point in the pieces in that a start-up might be much better served concentrating on more important performance indicators. Have a read and see for yourself.
How to price your products or services
Setting a price is a very important task for any business. Set the price too high and sales may not come; set it too low and you might not make money or customers might perceive your product/service as poor quality. As an accountant, I would of course first think of costs – without a clear knowledge of what your cost base is, how can you sell something at a profit. But other things determine price too, like the customer and the competition. Given that I’m sort of on holidays, and writing accordingly, here’s a great piece from inc.com that will help you set a price.
How do you measure your business performance? Ideas for small businesses
Measuring performance of any kind means a target, plan or standard must be in place to measure against. Any business, large or small needs some kind of a plan. In the accounting world plans equals budgets – yes those annoying things! A budget is plan expressed in money terms. Usually budgets for incomes and expenditures are set for a year and each month the business performance is measured against the budget. This is common practice in many businesses but how useful the comparison of results versus budget is depends on how good the budget was in the first place. Should a business complement measuring against budgets with other types of performance indicators? Yes is the answer. Larger businesses use many indicators of performance other than comparing to budgets or profits. For example, a key performance indicator for an airline is”bums on seats”. This is something that can be measured by flight, day etc and related to the costs of running the airline. Could a small business do something similar? Sure it can. Here’s an example for a business I know, Priority Engineering (www.priorityengineering.ie), who automate entrances gates for residential and business customers. This business both offers both installation and maintenance services. As a small business, the owner does not have time to do detailed plans and compare these to actual performance. But, he does know the costs of running the business. So he equates these costs to a number or service calls or installations needed per week. This is much easier to track and relates the work done to performance in terms of covering costs. So what performance indicator would you use for your business?
How Deere & Co manage business performance
Want to borrow money for your business? Some questions you should be asking.
All businesses are finding it hard manage cash flow in the current economic environment. Even harder is trying to raise finance for a new business venture, for working capital or for expansion. Media reports seem to indicate that bank lending to small business is particularly difficult.
Let’s assume you do get a hearing with your local bank manager. You’d probably plan on being bombarded with questions and maybe even grovel to get the money your business needs. Why not turn this on it’s head? Why not approach a bank with a list of questions to ask? The first question would be “is your bank suited to my business needs?”. A simple question, but some banks just don’t deal with small business or particular sectors (even in good times). Christine Lagorio (Inc magazine) writes eight more questions like this (9 Questions to Ask a Small Business Lender) with the help of Bob Seiwert, a senior figure in the American Bankers Association. The questions are (click the link above to read the answers):
Does the bank have any questions about your character?
Does the bank understand your reason for borrowing?
Is the amount you’re asking for reasonable?
What’s your cash position?
What are the risks to loan repayment?
Can these risks be mitigated without adding tough terms to your loan?
Do you think my company’s financials are strong?
Do you trust me?
Read the full piece, it’s really good advice.
Small business cash flow – a week from a business owners’ diary
One of the most common issues in small business today is cash flow. As sales decrease and consumers have less cash, smaller businesses are finding it difficult to get paid in some cases. I have spoken to 3 or 4 small business owners here (in Ireland) in the past week or so and while they are all “ticking over”, they all recounted difficulties in getting paid – none are cash only businesses. Some are sailing quite close to the wind with their bank overdrafts. Trying to live within the overdraft limit can become a daily task. And of course, it’s a viscous circle and both suppliers and customers are often experiencing similar cash flow issues.
To relate the kind of problems businesses are facing, and maybe you’ll get some help here, read the 5 blog posts by Paul Downs in the NYTimes. He has a small cabinet making business in Pennsylvania. Yes, ok it’s a US example, but the problems are the same as those in Ireland and elsewhere in Europe at the moment. Here’s a link to the first post from a week in Paul’s business.
My Week in Cash Flow: Monday – You’re the Boss Blog – NYTimes.com.
Links to the other four posts follow on from the above link.
Preparing a small business budget – 7 easy steps to help you plan
You’ve just started out in business, a first time entrepreneur. Maybe you’ve lost your job or given one up. Whatever the reason, you’re now in business on your own. Your business goals should include making some money. Waiting until the end of a year when dealing with an accountant is too late to see if you’re losing money. You need to plan, or budget from the start to avoid that daunting situation. A budget is simply a plan of revenues and costs for the coming year. It will not be the same as what actually happens, but you can adjust it as actual event happen. So where do you start? Below I outline 7 easy steps to help you. You might find these work quite well in a spreadsheet (MS Office, OpenOffice or even GoogleDocs). To keep it simple, let’s assume all costs are paid as incurred.
Step 1. Decide when the period of the budget. It’s normally a year, and this is broken down by month or quarter.
Step 2. Make a list of all the recurrent costs you know. Things like rent, purchase of goods for resale, wages and so on.Try to work out the costs according to month or quarter, as decided in step 1. Some costs may be higher or lower depending on the time of year e.g. heating or air-conditioning.
Step 3. Think about any one off costs you will have. For example, you might buy some new equipment. Add these costs to those in step 2.
Step 4. Now, think about the income of the business. Try to work out by month or quarter what you hope to sell and at what price.
Step 5. Now you have costs and income, so you have a basic budget by month or quarter. Adding all the number up will give you an annual budget. if you’re just starting out in business, you might find that costs exceed income, which is okay in the short term. At this point, you should be able to see how much profit or loss your business might make.
Step 6. As the months past by, compare your budget to the actual income and costs of the business. You might find that you have to revise the budget, which is always a good idea as it gives a better reflection of actual circumstances.
Step 7. Get on with your business, using the revised budgets as a tool to measure your business performance.
Most businesses of course do not pay for items immediately, but often get a credit period from suppliers or spread payments over a number of months or years. This means that a cash budget might need to be prepared also to complement an income and costs budget. I’ll post something soon on cash budgets.
The management style of Eugene H. Krabs
Ok, this post was written in the NYTimes Blogs on April 1st, but anyone with younger kids know’s the love Eugene Krabs (from SpongeBob Squarepants) has for cash.
As someone once said, cash is king!
Martin's accounting blog 