Weather eye needed on performance

HOW does a manager know whether his or her business is travelling well? Sales may be up and revenues may be high, but is that enough to ensure the business will remain profitable?

Financial advisers recommend managers keep an eye on key performance indicators for their business, and indeed revenue and sales are among these.

The key performance indicators all business managers need to consider can be simplified to fixed costs, variable costs and the amount of money coming into the business to cover those.

Besides identifying the key indicators linked to their type of business, managers need to refer to these indicators regularly.

These indicators will vary ac-cording to the sector the business is operating in, so it is important the business identifies them. For example, retailers will consider gross margin, revenue and stock turnover, while construction and manufacturing businesses consider safety performance to be a key indicator.

PricewaterhouseCoopers partner Ian Richardson said that, in retail businesses, managers should be looking at things such as gross margin, revenue and stock turnover.

“If you look at Coles Myer’s problems with Target it comes down to gross margin and stock turnover issues. By discounting they can get stock turnover up but gross margin goes down. If they keep the prices up, stock turnover reduces,” he said.

“This is not to say a retailer can’t conduct a loss-leader type campaign if the overall figures stay positive.

“For example Woolworths offers discounts on petrol if a customer pays more than $30 at its supermarket checkouts. It may make a loss on the petrol side, but providing that’s not eroding its overall margin it is not a problem.”

Mr Richardson said other things managers needed to consider were labour costs – the percentage of turnover they represented and the overall cost to a business’s finances.

“Whether you are using your funds effectively or are acting as a free bank for your customers is something you need to ask,” he said.

JGC Accounting director Justin Coppin said cash flow was another crucial key performance indicator to consider, especially for small to medium-sized businesses.

“You have to make sure you adjust your costs downwards virtually the moment your sales start to fall,” he said.

“People aren’t reviewing their figures regularly and are often finding, three months down the track, that they have a problem.

“Being turnover focused can be dangerous. You can have good sales figures but poor cash flow. Since the GST came in, cash flow has become more important than it ever has been.”

Mr Coppin said that despite the good economic news around, it appeared few benefits of that were flowing through to SMEs.

“We’re advising all of our SME clients to tighten their belts and weather it. It only takes a couple of bad months for a business to go under,” he said.

Clough Limited managing director Brian Hewitt said key indicators for his business included the size of its order book, the profit margin on each project and overall profit.

“The first indicator we have of where we’re going is the work we have in hand. If it’s too low we’re heading for a hole and if it’s too high then we’re either over committed or tendering badly,” he said.

“That leads us to our revenue figures and from there we look at the profit margin being generated on each component of the projects we are working on.

“The one problem with that is we don’t see the tax and other statutory costs filtering in at that level.

“From that information we look at overall profit and then our earnings per share.”

Dr Hewitt said its share price was the one thing Clough had no control over.

At Austal ships there are four key measures the company judges its performance by, besides the usual financial indicators such as sales and margin.

Firstly it considers man-hours per tonne of aluminium used. It also considers the percentage of waste aluminium against the amount of purchased aluminium.

Lost time injuries and safety are also key measures for the ship builder, as is earned value – a calculation of the progress of work measured against budget hours.

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