5 key performance indicators
Give yourself a clear overview of just how healthy your business is with a little help from QuickBooks Online.
Every business owner wants their business to succeed. While family members may religiously “Like” every post from your company Facebook page, and customers you’ve personally met just love what you do, there’s a lot more that goes into finding out how well your business is doing.
Knowing the right performance indicators will not only let you see how healthy your business is, but it will also help you decide what’s the next best move for it. In a recent survey that my company, AccPro Singapore Group conducted with our clients and SME businesses, we distilled five key performance indicators that every business owner should keep track of on a regular basis.
1. Net cash inflows
Cash inflow is essentially the lifeblood of your business and comes from customer payments, loans and investment funds. Cash inflow is what pays for essential business expenses (i.e. cash outflows) like your employees, rental, goods and services from suppliers. So, what you want is a stable, high and positive net cash inflow for your business.
When you’re a smaller business, it’s easy to keep track of this. But as your business expands to one where turnover is high, tracking cash flow can become much more difficult. The right way to track your net cash flow in such situations is inculcating good cash-and-bank-handling procedures with everyone in your team. However, human error is inevitable, which is why we advise our clients to utilise automated accounting systems that help in monitoring cash flow in an orderly manner.
2. Net profit
Business owners typically focus most of their efforts in getting in sales for the company. While increase in sales revenue is great, it’s easy to overlook the possible rise in costs with the increase in sales activity.
One of our clients who’s in the interior design business had fantastic revenue growth year on year. However, he didn’t have any proper accounting systems to track the sales and account for related business costs like sales commission and office rental. In such situations, a business might find itself making less at the end of the year even though they were selling more. Keep an eye on your net profit and don’t make that mistake.
3. Employee turnover rate
This is an ongoing challenge for smaller business owners because their employees need to take on a wide range of tasks and work on very tight schedules. Each and every employee in a smaller business usually wears multiple hats and any departure can be a huge blow to a team dynamic.
To keep your employee turnover rate low, it’s not just about ensuring that your staff have competitive remuneration packages; motivating them with work that they find valuable to their lives is key to retaining good talent.
That’s why we encourage our clients to leverage technology to deal with the more tedious processes of a business which in the past, was done manually. This allows their staff to focus on work that brings greater value to the business (and the employee themselves) like investing quality time in customer relations or strategic planning.
4. Current ratio
The current ratio is calculated by taking the total current assets and dividing it by total current liabilities. This ratio indicates the company's liquidity and ability to meet their creditors' demands, if the need arises. Healthy current ratio differ from industry to industry, but a typical ratio is around 1.5 to three times.
A higher current ratio is considered better because it indicates a business would be more likely to pay a creditor back. That said, if the current ratio is too high, it could mean that the business isn’t utilising its current assets as efficiently as it should.
Some of our clients have a very low current ratio, as there are substantial loans from directors in their balance sheet. This simply means that the business owners are pumping their own personal cash into the business and not getting the required returns back.
5. Debtors ageing ratio
This ratio indicates the average time it takes for the business to collect its debts. The earlier you collect the money from your customers, the better your cash flow. On the flipside, if it takes too long for your customers to pay you, it can strongly affect your business operations down the road.
While some customers may be unprofessional and hope you forget that they owe you money, a majority of the customers and clients you encounter may simply have overlooked your payment or be buried under too much paperwork that they were unable to send you a cheque in the stipulated time. So sometimes all that is needed is a timely follow-up with your customers to remind them on an outstanding debt. But that means, you need to find a way to remind yourself to get it done.
Victor Goh is a QuickBooks ProAdvisor and the Co-Founder of AccPro Singapore Group, a leading Accounting, HR and consultancy group providing Cloud Accounting, IT and operations consultancy for SMEs in Singapore. Find out more ways to build a successful business in Singapore here.