Can you identify your Key Business Drivers? (Part 2)
Updated: Sep 6, 2019
In part one of this article, we looked at benchmarking and enquiry levels in relation to identifying your key drivers. We'll continue by looking at your costs, stock and inventory levels.
Like sales, your costs (and therefore profit margins) should ideally be tracked every week. Focus on the key variable costs (the cost of materials or inputs to make products), and what causes them to increase or decrease. If you run a service business such as a consultancy that bills out time, it can be useful to regard consultants' salaries as variable costs (rather than direct or overhead costs) as this can more accurately reveal your true gross profit figure. It isn't hard to work out who is making you money and who isn't.
Maintaining a healthy gross profit margin is critically important. If your margins are falling, then you need to pinpoint why this is happening so you can take corrective action. The cause could be any number of things, such as higher input prices, a changing product mix, production inefficiencies or offering too many discounts.
Your working capital
To make sure you don't run out of working capital (the cash in the bank you need to pay the bills), calculate how much extra working capital you require to fund each extra 10% increase in monthly sales. If you don't have sufficient finance available, meet with your Financial Advisor to discuss possible funding options.
If you have overdue debts it's a sign that all is not well, especially if any of your customers are likely to default and leave you out of pocket. If your debtors' book is large and bad debts could place your whole business in danger of going bust, then it is a key driver to monitor. Pay close attention to your debt collection system and implement necessary improvements immediately.
An effective way to control debtors is to produce an aged list of debtors every week, showing which bills are overdue, and by how many days. Any payments that are overdue, suspect, or simply large should be highlighted and tracked so you can take prompt action. The key is consistency – late payers should know that you will unfailingly contact them.
Your inventory levels
Good stock control allows you to keep relatively low inventory levels while still keeping customers happy. A photographic retailer realised that their suppliers were providing a very reliable one-day turn-around for stock replacement. This meant the business needed to hold only one or two of each camera model, reducing their inventory by $30,000.
Your stock turnover rate is the ratio of cost-of-sales to stock. Most businesses aim for a high stock turnover rate, because it indicates an efficient use of capital resources. If the ratio decreases, find out why. For example, you may be overstocking or purchasing stock that you cannot sell. The more you break down your stock figures into separate product categories, the easier it will be to pinpoint problems.
Hours sold per day
A management consultancy had a disappointing level of monthly sales for years, until the owners realised that hours sold per consultant per week was the key driver. Once this was monitored, it became crystal clear which consultants were earning the revenue. Attitudes changed overnight and sales increased significantly. The consultancy was then able to seek small improvements that were manageable, such as selling 30 minutes more a day each.
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Original Article NAB Australia