One Report Every Business Owner Needs
By: Joe Zalewski, Senior Partner, JAZ Advisory Services
As a Business Owner/Executive you may not have time to analyze a complex set of financial statement, but you need to be on top of all of the financial trends of the company. To accomplish this, a simple one page report, which I refer to as a Key Performance Indicator report is a business necessity if you want to manage for success.
Your Key Indicator report should be easy to access and understand. It should be no longer than one page and contain measurement statistics on 8 to 14 key aspects of your business. Some of these Key Indicators include ratios applicable to any business such as liquidity, profitability, ability to pay back short and long term debt (financial leverage) and efficiency. A Key Indicator report should also contain some data unique to your business, product or service. The report should ideally contain 6 to 8 of the standard financial ratios covering the 4 segments as outlined above in addition to 2 to 6 other ratios or drivers that are key for your particular business.
The Key Indicator report is not just a collection of financial ratios. Some of this data are ratios but some, specific to your business, may be product or service information such as order backlog, inventory disposition and sales performance that forecast the direction of the business.
For example, one key indicator in the high tech industry is backlog and/or bookings. The high tech industry tends to calculate a ratio from backlog and bookings which is called “book to bill”. Their backlog is simply the amount of open orders that a company has on hand, whereas bookings are the amount of new sales which are added to backlog (shipping is then deducted from backlog). Thus, the book to bill ratio is simply the amount of new bookings compared to the amount of billings or the amount shipped and invoiced. If the Book to Bill ratio is going up then Backlog will increase and if the Book to Bill ratio is going down then Backlog will decrease. Obviously having Backlog increase is a good thing, up to a certain extent. If the Backlog is too great and the company is having problems meeting its customer requests for product on time then the company may end up losing customer orders and customers. Therefore, each company has to have a feel for the right backlog amount.
Another key indicator that some companies use is revenue generated per employee. This is another measurement of the productivity of the company. In conjunction with revenue per employee, you may simply want to know what the headcount was at the end of the month for the company. By comparing the current month headcount to the previous couple of months (which will also be on the report) the Business Owner can see the trend of new or terminated employees.
Some other items that you may want to have on your Key Indicator report is the number of customers that the company gained or lost during the past month, “Cash Burn Rate”
calculation, Advertising/Marketing expense as a percent of revenue or a inventory shrinkage ratio. The above ratios are some that a retailer, restaurant or personal service business may be interested.
As you can see, the Key Indicator report can contain any information that the Business Owner needs at their fingertips. The report should be no longer than one page and be a snapshot of the activity for the given month in comparison to the past two or three months so you can follow the business trends. And should help you make corrections, stock more inventory, increase prices, cut expenses, etc.
In summary, the Key Indicator report is a report that every Decision Maker should have at least monthly and sometimes sooner. The report should be flexible and contain a handful of statistics, ratios or indicators that are used to decipher the forces that drive the business. The Key Indicator report should be simple and quick to prepare and doesn’t take a CPA or other professional to decipher. You can delve further into the Financial, Sales and Marketing or Management Analysis reports of the company, possibly with the help of a professional, to determine the cause and potential fix to the problem if the Key Indicator report contains items that show a disturbing trend.
The Key Indicator report is simply a quick and easy to understand tool to guide you to areas of the business that need help and to point out areas that are doing well. Don’t run
your business without yours!
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Joe Zalewski is a Senior Partner with JAZ Advisory Services, which is a Division of Pride Enterprises,
Inc. JAZ Advisory Services offers business and management advisory services across a broad
spectrum of business and industry. Joe can be reached at (719) 219-9530 or