IT'S ALL ABOUT THE DATA

It was quite an eye-opener when our Managing Partner, Roy Shelton, had a chat with Andrew Bailey, the Governor of the Bank of England. They discussed the numerous factors the BoE considers before tweaking the base rate, which, as you know, affects the interest on loans and savings. They look at economic growth in different sectors and regions, inflation rates, and the underlying causes like energy and food prices, and wage increases. They also consider how much we’re spending or saving and why, as well as employment trends across various regions and industries.

Well as owner managers, Managing Directors and or CEOs of business, don’t we do the same?

When it comes to the most crucial KPIs in any business, we always emphasize cash. Monitoring your cash is like having a pulse on your business’s health because you can only run out of it once. Cash reigns supreme, but it’s equally important to delve into the data behind your cash reserves. Here are the key metrics we believe every business should track diligently:

1. Sales Revenue understanding your revenue streams is not just a case of did you sell more this month, quarter or year compared to the previous period. Dig in to the number and investigate what percentage of your sales revenue come from new or existing customers ,  the average spend per customer, what is the split between one off or monthly/ annual recurring revenues. These numbers do have a direct correlation on your ability to borrow money and the enterprise valuation of your business.
2. Customer Churn how many customers did you start the period with and how many do you have at the end of that period. Current Customers + New Customers – Chun tells you a lot about the stickiness of your customer base and your ability to win and retain them. Dig in to churn, what are the commons reasons customers leave or is it sector/ regional volatility with insolvencies?
3. Gross Profit gives a clear indication of how efficient your value chain is performing from procurement of raw materials and components along with your direct labour costs to produce the products and services to your clients.
4. Overheads are like finger nails, left unchecked they grow too long and become unmanageable. Perform a line by line review of all overheads and for each item and then ask ” Do we need this cost and if so, is it the best solution and cost for us”? If not either drop the cost or find an alternative supply partner.
5. Operating Profit is a great measure of a company’s ability to generate profits from its core activities and how efficient it is in doing so.
6. EBIDTA Earnings Before Interest, Deprecation, Tax and Amortisation is one of the key metrics lenders and buyers of companies consider. It demonstrates the company’s ability to operate and create cash for expansion, service debts and or pay dividends to Shareholders.
7. Quarter on Quarter / Year on Year Comparisons how well is the company performing compared to previous periods. Are there developments in the micro or macro environments which are driving / restraining that performance. What trends can you identify which you can ride the wave of or become more mindful of.
8. Aged Debtors how fast are you collecting your hard-earned cash? If you are too liberal your borrowings (and costs may increase to cover funding your sales ledger) what about managing the risk of late payers. Cash is king (especially when it’s in your bank and not your customers).
9. Aged Creditors how quick do you pay your suppliers? Maintaining a healthy relationship with your supply chain and paying them as close to terms is vital in building trust, you never know when you may need extended terms or a quicker turnaround on orders.
10. Gearing is an traditional indicator of the financial risk associated with a company. If a company has too much debt, it has the potential to fall into financial distress. Remember: A high gearing ratio shows a high proportion of debt to equity, while a low gearing ratio shows the opposite.
11. Stock Levels should be right sized to meet your client and market needs. Much more than 45 days of inventory you are starting to deploy too much cash into stock, unless you have a holding or sale/ return arrangement with your suppliers.
12. Employee utilisation/ revenue generated per head again demonstrates how well you are utilising your greatest assets. Sectors differ greatly, in the technology/ Managed Services Providers (MSPs) sector you typically want to be looking at 3 x gross annual salary + on costs per employee.
13. Customer and Employ Satisfaction, unhappy customers and staff vote with their feet. Running half yearly satisfaction surveys is a great way to engage both sets of shareholders and even better if you listen and act on any feedback.

While these measures aren’t comprehensive, adding more might lead to measuring just for the sake of it. Keeping an eye on these metrics will offer a transparent perspective on your financial status, productivity, and efficiency, similar to Andrew Bailey. This ensures you’re well-informed and ready to make critical decisions.