Like in your car, the dashboard for your business provides you with a visual of the key components or critical drivers your business requires to arrive at its objectives. It provides you with alerts which show areas which need attention and enables better decision making, faster. Without these alerts, your car – your business may not achieve its objectives and could breakdown at an inopportune time.

Before you begin to consider the numbers and types of measures you should put in place, it’s important that you have clarity on the goals and objectives of your business, to ensure that the right measures are identified.

Once your key measures are set, it becomes vital to have an ongoing monitoring process in place, to measure your performance and progress towards those goals and objectives or critical success factors because, to quote Peter Drucker (writer and management consultant) “What gets measured gets managed”. If you don’t like what you see at any given time, you can do something about it and drive future improvements in performance.

It is also important to have measures in place to monitor a wide range of ‘performance indicators’ in your business, so that you can identify any trends, strengths, weaknesses and areas of opportunity.

These measures are commonly known as Key Performance Indicators (KPI’s). KPIs represent a set of measures focusing on those aspects of business performance that are the most critical for the current and future success of a business. They are quantifiable measures that can be expressed in either financial or non-financial terms.

Financial Measurements

Financial measures are typically derived from or directly related to the chart of accounts found in a business’ profit and loss statement or balance sheet, such as inventory levels or cash on hand.

Non-Financial Measurements

Non-financial measures are any quantitative measures of a business performance and not expressed in monetary units. Common examples include measures of customer or employee satisfaction, product quality, market share, or changes in consumer confidence.

There are a number of areas that are particularly important for ensuring the success of a business and where the use of non-financial measures plays a key role. These include:

• ?  The management of human resources


• ?  Product and service quality


• ?  Brand awareness and company profile

Non-financial performance measures are sometimes considered to be leading indicators of future financial performance, while financial performance measures such as earnings or return on assets are commonly considered to be lagging measures of performance. Let’s explore this further.

Leading Indicators (non-financial)

Tells us how our business is performing now and serves as our headlights; and provide us with an early view of likely future performance. Leading indicators also provide us with the early opportunity to intervene (right the ship) and improve future performance.

Lagging Indicators (typically financial)

Tend to look into the rear view mirror and tells us how our business has performed in the past and also how we’re performing or doing today. It is important to have a good awareness of both leading and lagging indicators.

So what are some of the key measurements to consider? Given that sales, profit margins and cash flow are the lifeblood of any business, owners should place particular emphasis on these areas of the business

The following are some of the important financial measurements or KPIs for monitoring are:

• ?  Stock turnover – days: reflects the number of days that it takes to sell inventory. The lower the ratio means the quicker the stock is sold.


• ?  Debtor turnover – days: reflects average length of time from making a sale to cash collection. The lower the ratio means the quicker that accounts are being paid.


• ?  Current ratio: Indicates the extent to which current assets cover current liabilities and is a measure of the ability to meet short-term obligations.


• ?  Debt/equity: is a measure of the extent to which a business relies on external borrowings to fund its on-going operations. A high ratio indicates a reliance on debt rather than owner’s equity.


• ?  Interest coverage. Provides a measure of the ability of the business to meet its interest commitments out of profits.


• ?  Return on investment. Represents the after-tax return that owners are achieving on their investment.


• ?  Gross profit margin. An indication of the profitability of the business and reflects control over cost of sales and pricing policies.


• ?  Breakeven sales. Reflects the sales that need to be generated in order to cover expenses. In other words, this is the level of activity at which, neither a profit nor loss is incurred or where total costs equate with total revenue.

The final step in the performance measurement process is having the awareness of what these measures are telling us and how they reflect the nature of your business.

Once you understand the causes of the results in your business – both the good and the bad – you can decide what you want to do differently to change your results in the future. The future will not change unless you take action to change.

So identify and embrace the key measures for your business. Use the information to ensure the engine that’s driving your business is operating optimally and that it will get you (your business) to your destination in better shape.