Why Do You Need Key Performance Indicators?

Key performance indicators are one of the hallmarks of good business management. Performance indicators provide an analysis of the overall business operations of a company, which can be used to make decisions about finance, employee training, resource deployment, and many other facets of the business. Although universal indicators do exist, business owners will benefit more from having information about their individual companies.

Goals related to sales, production, resources, and more are clearer and more measurable when companies use key performance indicators. Over time, performance indicators create a historical record of business operations, so that it is easy to make comparisons year-to-year or quarter-to-quarter.

Performance indicators can serve as an external benchmark that allows for the comparison between a company and the industry standard. It can be difficult to measure the performance of a small business to that of a larger operation, but performance indicators let business owners look at smaller, more comparable data sets.

Using performance indicators to set company policies can help make sure that all employees follow the same operating standards. Policies related to customer service can benefit from the use of customer service performance indicators, and operational managers may find performance indicators useful in reviewing employee performance.

Key performance indicators usually track money spent on business operations and the return from business opportunities. Implementing performance indicators that specifically track cost cutting measures or increasing sales can enhance profitability by allowing for small operational changes that have a big impact based on what the performance indicators show.

Tips for Developing Individualized Key Performance Indicators

Set your goals. 

Without clear goals, performance indicators cannot measure progress because no one knows what they are progressing toward. Specific, clear goals for each area of the company from safety to sales to employee performance.

Attach numbers to each goal. 

Giving concrete value to each goal provides specificity and gives the company clear, measurable objectives.  How many new customers  are necessary? How many safety violations must be avoided? How much money needs to be saved through cost cutting measures? “Increase profitability” is a vague goal; add $1 million in new sales is clear and measurable.

Track progress that has already occurred.

 When key performance indicators are paired with specific company activities, it becomes easier to develop indicators that will measure progress toward future goals.

Take a close look at the current numbers.

Analyze the numbers in each area of review and determine the percentage of change that has occurred. Examining current numbers will help in developing effective goals for the future.

Decide how often the indicators will be reviewed.

Key performance indicators should be reviewed at set dates throughout the year; different areas will require different frequencies. For example, financial indicators may be reviewed monthly, but employee review indicators may only be reviewed annually.

Scalability as a Determining Factor for Outsourcing

 Several factors determine whether or not outsourcing specific tasks is the best option for your company’s needs.  Scalability is one of these.

At the core of the scalability factor rests the theory that you only pay for what you use.  This means that a small business can save a significant amount of money that would otherwise have been consumed by retainer costs.  Several advantages exist to working under a scalability model:

·       Allows for businesses to outsource only that portion of projects which may prove expensive to manage internally

·       Augment existing staff or services during identified high traffic or peak activity periods to better service clients and customers

·       Ability to draw on and access key expertise areas when needed for specific aspects of projects or services without having to absorb costs for that expertise full time and “in house”

Determining Scalability

Scalability, by itself, is a major factor in determining what to outsource and to whom.  The extent to which a vendor allows you to scale back operations can also influence the decision to outsource.  Other factors that influence outsourcing on the basis of scalability could include some of the following elements:

·       Scalability inherently requires some degree of automation.  A vendor with high investment in the latest technology and understanding of how to integrate business requirements with tools and applications is best suited to offer scalability.

·       Scalability may not be applicable to all processes; in services that are people driven, it may not be possible to scale back operations at all

·       Understanding how much to scale back, and when, can be determined only by a vendor with significant maturity or experience

·       An organization or a vendor offering scalability can demonstrate breadth and depth of services and have process – driven solutions with proven methodologies and strategies

·       Executing scalability requires the existence of quality infrastructure.  To ensure a steady stream of business continuity, it is essential that the documentation process be thorough and structure applied at all stages to ensure success of the project time and again

Scalability as a Reflection on the Vendor

A vendor who has invested significantly in training and coaching its manpower can ensure high returns for its clients by ensuring quality work.  The combined experience of efficient automation with experienced human resources and input positions a vendor to offer relevant client solutions, consistently and repeatedly.

How Small Businesses Can Leverage Cloud Computing

Cloud computing is redefining how businesses run, impacting the operations of large enterprises as well as start-ups.  For some the notion of “cloud computing” is a relative new concept. 

Cloud computing provides businesses with access to the valued end result or output of equipment and   Most often, cloud computing is delivered as software as a service (SaaS) where users can access a web based solution via a subscription without the heavy investment in the IT infrastructure to support it.  Recent growth in cloud computing is partly driven by the growth in mobile technology platforms that allow users to access information anywhere, anytime.

software, without the ownership or maintenance costs required by purchasing it.

Although large enterprises with multiple geographically dispersed offices have benefitted from cloud computing, it has been an even greater benefit to small business.  Small businesses now have access to enterprise solutions via the cloud computing that would otherwise be unaffordable for them.  Even more importantly, these cloud based solutions allow small business to function more like larger business in the information they can access while simultaneously maintaining the flexibility and agility of a small business, allowing them to react and adapt to situations. 

Some of the benefits cloud computing provides for small businesses include:

• No heavy investment or maintenance costs in IT.  The software as a service method allows multiple users to subscribe to the solution.  The vendor providing the solution- Intaact, NetSuite, etc., absorbs the maintenance costs, and by offering the service on a subscription basis can pass along cost savings due to economies of scale attributable to user volume.
• Ease of implementation. Cloud based solutions eliminate the need for small businesses to invest in infrastructure development, training, and support. Businesses subscribe to the service, and training and support are provided by the vendor on an as needed basis.  The business owner can subscribe and unsubscribe to the cloud service as they wish.
• Redeployment of IT.  For small business with limited manpower, cloud based services free up time for IT resources to be redeployed on more strategic initiatives or reduce the need for full time IT employees.
• Security. Business owners should always check this, but reputable cloud based solutions are knowledgeable about the most up-to-date security measures and encryption technology.  This becomes one critical task which the business owner does not need to address, as the responsibility is absorbed by the cloud service provider who may have more expertise in this arena. 
• Scalability.  Most cloud providers offer packages with different access levels so that small businesses only need to pay for the services they require and use, resulting in overall cost savings for the small business.
• Business Continuity/Disaster Recovery.  As a small business, this is a critical task which can often lack the attention it deserves simply due to manpower and bandwidth.  Cloud based services assist with this, as they back-up critical data offsite as part of providing the solution, facilitating access to this data in case of an emergency.

Small to mid-sized businesses have the most to gain from leveraging cloud based solutions in their business operations.  If you would like to learn more on how Alan Neal & Associates can assist you with selecting and implementing an appropriate cloud based solution for your business, please call me directly at 423-756-4076 or email me at alan@alanneal.com

The Importance of Benchmarking

Benchmarking is used by many business owners to assess the health of their businesses. An industry benchmark is typically a range of financial performance metrics in key areas, compiled by averaging data from a group of comparable businesses. These benchmarks provide a reference point for business owners to gauge the areas of financial success and measure progress against established goals.

When evaluating benchmarks to assess financial successes and progress the following should be considered:

Compatibility of data - When selecting comparable companies, the businesses selected should have many similar characteristics. For example, the comparable companies should be similar in size, offer similar products and/or services, have a similar corporate structure, and an equitable number of employees. Comparing a company with 500 employees to one that has 25 will not be a good comparison--even if they offered identical services.

Time period of data - It is imperative to understand the time frame of data comprising an established benchmark when comparing a business’ financial performance to that benchmark.  For example If you have a retail store and you want to compare it against other retail stores that are similar in size, product, and corporate structure and the data from the benchmark  was compiled for the period  January 1 2008 through December 31, 2008 and the data collected for the retail store is January 1 2012 thru  December 31,2012, the bench mark may be faulty because economic conditions may have changed substantially.

Calculation methodology - When developing benchmarks, it is important to know how the comparative businesses arrived at the calculations so that the financials are a true comparison.

Key metric comparisons - There are several ratios that businesses use to assess financial performance which can be useful to benchmark. These include

• profit margin - measure of profitability 
• current ratio - measure of liquidity, current assets/current liabilities 
• quick ratio -measures immediate cash liquidity, cash, plus accounts receivable/liabilities 
• debt/equity - measures how well a company is leveraging its debt 

Financial benchmarking is a valuable tool for small to mid-sized businesses in assessing how they compare with their peers. Alan Neal & Associates is currently offering a free analysis of your business processes and accounting system. If you would like to learn more on how we can assist with your business processes, including benchmarking, please call me at 423-756-4076 or email me at alan@alanneal.com. 

Evaluating the Efficiency of Your Accounts Receivable Processes

You can ensure your company's accounts receivable processes remain efficient by reviewing the performance of the collection processes and key metrics associated with them. Below are some suggested metrics that you may consider integrating into your financial analyses in order to determine whether you are using optimal accounts receivable processes. 

Receivable Turnover Ratio - This is your credit sales divided by average accounts receivable.  This measures the number of times trade receivables turnover during the year, and is an indicator of how efficiently your company is collecting credit sales. Maintaining a sound accounts receivable practice and a strong credit policy help maintain the liquidity of your business. The higher the turnover of receivables, the shorter the time between credit sales and cash collected on those sales. 

Days Sales Outstanding - This measures the average time in days that receivables are outstanding or uncollected. Generally, the greater the number of days outstanding, the greater the probability of delinquencies in accounts receivables. The longer your credit sales remain uncollected increases the probability of the inability to collect those receivables. 

Accounts Receivable Follow-up - The increase of two or three days in sales outstanding can have a significant negative impact on the liquidity of a small to mid-sized business. Consider creating an account collection procedure that provides the actions and methods for processing late or delinquent payments. The account collection process should commence as soon as the account becomes past due. These functions and reminders should be automated wherever possible. 

Consider evaluating your accounts receivable processes based on these metrics and practices to improve the collection process of your credit sales. 

 

5 Tips for Forecasting & Maintaining Cash Flow

1. Calculate your break-even analysis. The budget process begins with a break-even analysis, the equation that shows a business' base cost to provide its product or service. Due to the uncertainty of revenue, businesses must keep fixed cost to a minimum, and manage the variable cost closely. Most business owners are preoccupied with covering daily expenses and making payroll, and fail to perform this analysis, exposing their businesses to undue risk. 

2. Re-evaluate fixed expenses. The fixed expenses normally represent the largest expenditures from a company's cash flow. As a business owner, you should second-guess your fixed expenses to see where savings may exist. Be certain the fixed costs are commiserate with revenue levels, and scrutinize all variable costs to death. 

3. Review financial status monthly for tax purposes. Review your financial statements monthly in order to know the tax liability incurred and include this liability into the cash flow forecasting schedule. 

4. Know your business and know your customers. Knowing your customers' payment habits is the key to producing a good cash flow forecast. When forecasting the in-flow and out-flow of cash, things rarely - if ever - go exactly as you plan. But, the better you know your business and your customers, the more accurate your forecast will be. 

5. Evaluate variable costs at least every six months. You should regularly evaluate or audit variable expenses, such as office supplies, for necessity.