Identifying Your Business Drivers
Identifying and monitoring the key drivers of your business will help track what’s happening in your business and trigger red flags for when remedial action is needed. A whole range of internal and external factors affects the performance of every small business, so the secret is to focus on a handful of key drivers that:
- Reflect the performance and progress of your business
- Are measurable
- Can be compared to a standard, such as a budget or last year’s figures, or an industry average
- Can be acted upon.
Sales or revenue is one indicator that it easy to monitor. But sales might not be the actual driver for your business. It could instead be the number of sales calls you make, or your follow-up service campaign, or the amount of traffic that hits your website. These are the drivers that help you generate sales.
Use your historical figures as a benchmark for your current performance. Figures for last year and last month provide hard facts and established patterns for your business and identify potential problems and opportunities. In addition to your internal benchmarking, try to compare your business with similar businesses in our industry. Your accountant, or industry body may be able to supply comparative figures for your industry or help you access the data.
Some key drivers
The range of business drivers varies enormously from business to business. For example:
- Sales leads in a capital goods or service business
- Sales per square meter in a retail business
- Machine downtime in a factory.
Even direct competitors may use different drivers to improve their business performance. For example, prime location is not a key driver for an internet-based business, but it is for a ‘bricks and mortar’ competitor that relies on well-located retail stores to attract foot traffic. Following are some drivers that could be relevant to your business.
The amount of online activity can also be a key driver if your business relies on the internet. Increasing web traffic, more online queries, and an increase in social media followers or activity can all lead to signaling that all is well.
Enquiry levels (or number of leads, or quotes given) provide early warning of any peaks or troughs in your sales.
Monitor where the enquiries come from to establish which marketing campaigns work. If you have an established enquiry-to-sales ratio and know the size of an average sale, you can use the enquiry level to forecast turnover.
When you review sales, monitor:
- Which categories of product are selling well
- How your priority products (those with the best margins and the best payment terms) are selling
- If conversion rates (the ratio of leads to sales) are changing.
If you don’t know where your queries are coming from, now is the time to find out so you can assess if there are more where they came from.
Like sales, costs (and therefore profit margins) should ideally be tracked every week. Focus on the key variable costs (the cost of materials or inputs to make products), and what causes them to increase or decrease.
Maintaining a healthy gross profit margin is critically important. If your margins are falling, then you need to pinpoint why this is happening, so you can take corrective action. The cause could be any number of things, such as higher input prices, a changing product mix, production inefficiencies or offering too many discounts.
If you have overdue debts, it’s a sign that all is not well, especially if any of your customers are likely to default and leave you out of pocket. If your debtors’ book is large and bad debts could place your whole business in danger of going bust, then it is a key driver to monitor. Pay close attention to your debt collection system and implement necessary improvements immediately.
An effective way to control debtors is to produce an aged list of debtors every week, showing which bills are overdue, and by how many days. Any payments that are overdue, suspect, or simply large should be highlighted and tracked so you can take prompt action. The key is consistency – late payers should know that you will unfailingly contact them.
Your inventory levels
Good stock control allows you to keep relatively low inventory levels while still keeping customers happy.
Your stock turnover rate is the ratio of cost-of-sales to stock. Most businesses aim for a high stock turnover rate because it indicates an efficient use of capital resources. If the ratio decreases, find out why. For example, you may be overstocking or purchasing stock that you cannot sell. The more you break down your stock figures into separate product categories, the easier it will be to pinpoint problems.
For most businesses, the key drivers include major cost-efficiency items but drivers often include ‘soft’ factors. For example, effective networking (the ability to build new business relationships) has proved to be the key driver for many small businesses.
The measurement of drivers is sometimes indirect. For example, if you have identified employee morale as a driver, you could monitor it by tracking voluntary overtime, absenteeism and sick days. The drivers may change with time due to the growth of your business, changes in your market or simply seasonal changes.
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For informational purposes only. There is NO WARRANTY, expressed or implied, for the accuracy of this information or its applicability to your financial situation. Please consult your financial and/or tax advisor.