- August 17, 2021
- Posted by: Manuels Effe
- Categories: Finance & accounting, Insight
Business is like a car on a journey. Before the driver sets out, she should check if she is ready for the trip. As she drives, she should also check things like her speed, tyre pressure, engine temperature and fuel on her car’s dashboard.
My Trip To Work As A Business
On an average day here are the stats of my daily trip to the office:
– Distance: ~20 KM.
– Time: ~30 minutes by Car
– Fuel: ~1.5–2 litres of Petrol
– Tyre Pressure: ~34–38 psi
Before each trip, I ask myself — Do I have enough petrol for the journey? Do my tyres have enough pressure? Etc. What if I started the day thinking I was going to work but halfway, an unplanned meeting meant it changed to a 3-hour trip? My assessments about fuel and tyres change. I no longer have enough tyre pressure or fuel for the new journey. It’s all in the measurement of the various inputs for the journey using the Car dashboard.
It’s the same for Business. Too many people go into Business without regularly checking their Business tyre pressure and fuel gauges. Worse, they don’t have the Business Dashboard to check. The result? Many failed or failing entrepreneurial trips.
Ways to Measure Business Performance
Business Performance means different things to many people. No particular perspective is right or wrong as long as the right context is used. To borrow from our journey analogy, say someone asked about the distance between Point A and Point B, you wouldn’t respond with the amount of fuel needed (the liquid metric). You would respond in Miles or Kilometres (the distance metric) or minutes or hours (the time metric)
Here are a few simple ways to measure Business Performance;
1. Sales: Money your business makes in Sales tells how a business is doing because it shows there is a market for the product or service. However, this is not enough because it doesn’t show how much you’ve incurred in expenses.
2. Customers: The number of Customers your Business has gives some indication of Business Performance. Its downside: expenses used to earn Sales income are not considered
3. Costs: Costs are a good way of measuring performance. Costs are a necessary part of running any business. There are fixed costs e.g., machinery or buildings, direct costs eg direct labour, indirect costs or overheads eg electricity, subscription, sales and marketing. There are sunk costs (costs that you cannot recover such as registration fees) and Opportunity costs which are the benefits you lose for incurring actual costs.
4. Cash: a Business’ cash position is a really powerful tool to measure performance. Amazon is famous for prioritising cash over Accounting Profit. Its downside: Presence or absence of Cash does not equate to Profitability
5. Age: How long a Business has operated could be a useful indication of how well it has performed. However, there is the saying Age is just a number and nothing more. For tax purposes, it is important to distinguish between a Business’ date of registration and its date of commencement.
6. Profits: Profits are the most widely used tool to measure Business Performance. Profits are what’s left for owners after expenses of running the business are removed from Sales Income. It is not unusual for companies to make a loss over a period of time before they turn a Profit.
Blended is Better
These tools are not that useful on their own. They become potent when you use them together. For instance, it is useful to look at Profits over 5 years instead of looking at them for just one. Similarly, it is more effective to consider the customer acquisition and churn rate alongside Sales over 6 months instead of considering Sales alone
Before you start Measuring Business Performance, you have to create a system that collects basic information about your ALL daily business transactions. This is Bookkeeping. Every business inflow and outflow must be recorded. Next, put all that information together to help you make sense of the numbers. This is Accounting. If you have neither the time nor the skill to do this, hire or rent an Accountant to help.
SSAC Advisory and Professionals (SSAC) is the consultancy arm of the highly respected firm of Chartered Accountants, S.S. Afemikhe & Co. established in 1986.
SSAC is a multidisciplinary company with over 35 years of experience in providing efficient and effective value-adding consultancy services through working with global companies, whose knowledge and technical expertise offers excellent, superior performance, and provides wide-ranging opportunities for our clients.
Next, get Accounting Software to help you and your Accountant digitise the process. BMAC Accounting comes to mind here. Finally, measure your Business Performance daily. Knowing the state of your Business empowers you to make better business decisions.
Curl From: Sam A. Afemike