Blinkers verses Indicators: know your business performance metrics

By David Campbell*

Franchise Finance Meeting

In a business there are three roles that a franchisee or small business owner must be aware of in order to understand the different roles:

  • Shareholder;
  • Director; and
  • Employee.

In relation to Directors and their responsibility in the oversight and governance of the business, I received quite a bit of feedback asking what sort of performance metrics should be measured.

How long is a piece of string? There is an unlimited amount of statistics that could be measured which are only limited by the time and systems available.

The real key is to create a simple dashboard that provides a regular summary view of the key business forces and profit drivers.

Sales, Margin, Expenses and Productivity. We refer to them as the Four Forces.

There are a few areas that you should look to measure and compare over time. The actual performance each month, the trend being achieved through the year, and a comparison to the previous year.

Additionally, if the business has targets then performance can also be compared to your year to date targets.

Performance to the prior year and the key targets are crucial management tools for determining the major impacting factors on any profit deterioration from last year or from the required target. Realistic and functional planning is a condition of good performance intelligence.

A simple but essential management function is checking the results and trends of these key factors:

  • Sales and their drivers – customer count and average spend
  • Bankable margin and the margin % earned
  • Operating costs and the main variable costs, using percentage of sales
  • Labour efficiency to bankable margin.

Labour efficiency is a key ratio as it is often a lead indicator to a range of other emerging issues. The efficiency ratio is the measure of labour costs to bankable margin. It demonstrates the connection between staff and inventory. In other words how effective is the business in converting product into sales and cash at the best yield.

This one ratio can tell a lot about how effective a business is or is not being managed. This simple and easy to prepare report would provide most businesses with a clear view of their core KPIs.

There are many indicators to measure performance in business that are worthwhile, so don’t be blinkered into to limiting the key performance indicators for your business.

To lean more about measuring business profitability and performance join Griffith’s finance workshops (2 day) and masterclasses (4 day) with David Campbell in 2017.

 

Finance Training for Franchisees

Get the templates and learn the techniques to ensure your franchise business becomes financially sustainable at our Franchisee Financial Essentials Workshop in Brisbane.

*David Campbell is the Director of Avatar Consulting and currently works with the Asia-Pacific Centre for Franchising Excellence to facilitate our franchise finance workshops and masterclasses.

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