I have written quite a few posts on performance management of firms and how management accountants can use both financial and non-financial performance measures. One thing I have not thus far mentioned is the actual presentation of such information. I am not one of those people who uses the bells and whistles and products like Powerpoint, but I do appreciate that information presenting in a short, concise format. One way to do present information in a clear way is to use a graphical format. So, here I give a great example which a kind reader of my blog referred me to.
We all know how successful Apple Inc are. Now you can look into their annual reports and analysts presentations to get a view of how much money they make. But wouldn’t you love to know what Apple’s managers get to see on a regular basis in terms of the company performance. That is, what kind of performance measurements might they use and report on internally. Below you’ll see a great infographic on the performance of Apple’s retail stores. The data shown is self-explanatory, so I will not detail it here. When I first saw this graphic, I thought wow, wouldn’t this be a great internal performance measurement tool. Of course, we don’t know if Apple actually prepare something like this infographic, but it is certainly quite effective at getting the message across.
In management accounting, we often talk about Key Performance Indicators (or KPI). These are measures of business performance which catch the essence of how a business is doing. Choosing the right KPI is not an easy task, even for a business with accountants on the payroll. This leaves it tough on smaller businesses, who probably have little expertise in this area. Having said that, there are a number of key things you might focus on as a small business.
The first is cash, without it you are snookered. Accountants often refer to liquidity issues, meaning a business cannot generate enough cash. Liquidity issues lead to solvency problems, meaning you can’t pay debts as they fall due. Traditionally, accountants will tell you need the ratio of cash and receivables to payables to be about 1:1. To make this sort of metric even easier, why not think about it like this:
Cash in the bank/Monthly cash requirements = number of months until cash runs out.
You could easily work this measure out at any time and try to collect debts from customers before you run out of cash. If you have a bank overdraft which is within its limit, you could quickly alter the above to figure out how long until you hit the overdraft limit.
A second key metric is your cost structure. You could regularly compare you costs as a portion of sales revenue. Keeping a tab on this might help prevent cost overruns over a period of time. So if you see sales drop off, are costs remaining the same?
Finally, think beyond the traditional financial measures. Try to think of what it is that keeps your business ticking over. The key metric(s) here will vary by business but you should consider things like:
- number of new sales enquiries
- number of customer complaints
- how efficient is your production and/or purchasing
- what’s your market share.
- sales revenue by customer/product or segment