Business performance indicators / benchmarks

[Not your average framer]

I've often heard about these so called business performance indicators / benchmarks. I can't really say that I know enough about them, but I would like to learn more.

I'm talking about things such as, stock turnover ratios, or ratios of fixed overheads or variable overheads in relation to gross profit.

No doubt there are plenty more which I've not heard of, but there are supposed to be some ideal ratios, which business managers are supposed to aim for.

Does anyone know more about these? Discuss?

[Gesso&Bole]

This is a huge topic, and one that I have spent much of my professional life dealing with. So to kick off the reply, I have copied and pasted some relevant parts from a book I am currently working on. I hope it makes sense as a reply to this post.

Business Performance Ratios

Industry business performance ratios have a place, particularly in big business, and in business plan writing, and of course the VAT and Inland Revenue use them to quickly analyse whether your VAT/Tax return falls into the ‘normal’ parameters. Business Consultants love them too, and create a myriad of complicated names for them to make themselves appear very clever.

Typical examples of performance ratios would be;

Staff costs in the hospitality industry typically represent 28-30% of turnover.
Parcel Delivery companies will spend 30% of turnover on vehicle and fuel costs.
Etc etc.

In big business, this sort of information is collated, and used every day. Sainsburys, for instance will compare their own performance with that of Tesco, Asda, and Morrisons on 100s of different, quantifiable points, like staffing levels, pay-rates, stock turnover etc

Within the picture framing industry it would be possible to research, or compile data to give ratios for almost any aspect of our fine business. In fact, much of this information is available on this forum. Most of us share this sort of information (in an unscientific way) with other framers and with other business people on a day to day basis – discussions on business rates, how much we pay to get rid of rubbish, how much we would charge for xyandz etc etc.

A quick google search gave me http://ato.gov.au/businesses/content.as ... 238454.htm


The problem with this sort of information is that it is expensive to get accurate information when dealing with a fragmented industry with very few large players, and in most cases impractical for a small business to commission this research.

So what should a picture framer be doing in this respect?

Well, I believe the secret here, is to write a detailed business plan (yes, even if your business is years old). This plan will be based on some industry norms, but will be tailored to your particular circumstances, and to your hopes, aspirations and skill levels.

Once you have a detailed plan, which will probably cover, marketing, sales, pricing, overheads, production methods, financing, and Human Resources. Then you will need to identify and quantify your KEY PERFORMANCE INDICATORS (commonly known as KPIs). In effect these will be your own personalised, internal business performance ratios.

Some examples of KPIs that may be appropriate for a framing business are (there are hundreds that could be measured)
a) Number of new trade enquiries
b) overall % margin for month
c) gross profit per month
d) stock level (normally measured in days)
e) cash-flow

The important point, is that these KPIs are measuring the KEY areas that may go RIGHT or WRONG with your business. So for example, just measuring SALES for the month could get you into a whole lot of trouble . . . . .

Lets look at this example of Dave the framer and his sales figures for last year

Month Sales (£)
Jan 3000
Feb 3100
Mar 2900
April 3500
May 3250
June 7000
July 6500
Aug 7200
Sep 7000
Oct 7500
Nov 9500
Dec 10000

From the sales above, it looks as though things started to really look up for Dave in June. But actually he had to close the business down in December.

Why? The work he was doing up to May was retail, bespoke framing, and his margins were over 70%, and he was able to complete the work himself. In June he got a large contract, which, although not quite as profitable, was steady and reliable. So what went wrong?

Dave needed to contract out the mount cutting to a framer down the road who had a CMC, so his margin suffered a bit, but he wasn’t quite sure how much. He needed to employ an extra member of staff, but they weren’t quite as careful at stock conservation, and made quite a few mistakes cutting too short on the Morso. Because they were so busy with the new contract (that was getting bigger by the month) they were not able to complete all of the bespoke work, and some customers went elsewhere. Their new contact customer said he would pay on 30 days from invoice, but Dave was a bit slow invoicing because work was piling up. Infact it was late August before Dave realised that he hadn’t been paid for the work delivered in June, and he only noticed this because he didn’t have enough money to pay his suppliers.

Dave is in the process of selling his house now, in order to clear his debts, and is hoping that he may have enough capital left to set up again in the garden shed of his new rented house.

What will he do differently?

He will look at his KPIs. If he had done so last year, he would have realised that the trade job he took on would kill his business unless he maintained 100% of his existing bespoke business, and that he needed to collect in the cash more quickly.

When Dave was asked to comment on this he said

‘Education is expensive’

[Not your average framer]

Thanks Jim,

I have already started analysis my current month on month figure by adding a few fomula boxes to my normal monthly spreadsheet. I am also revisiting my results from previous years to try and get a little more feel about running my business more efficiently and more effectively.

As you have probably already figured out, this is something I don't know much about, but if this recession is going to be around for some time, I want to sharpen up my act AT ALL LEVELS. Maybe others are thinking the same.

Incorporating the necessary KPI calculations into my monthly spreadsheet is easy, so I figure that I do so and see what I can learn from it and what it may be able to add to the management of my business.

Essentially, I'm not sure how many smaller businesses will survive the next few years and I don't think that I can safely continue to just run my business on the basis of experience, instinct and reacting to situations as they occur. I'm looking for that extra bit of edge, which I hope will make a significant difference.

[mikeysaling]

you may not want to hear anything from an ex banker!!! but in my 30 years of working for one of if not the largest us bank - i saw things from the early sixties where 'sales' loans etc produced the big bucks! but later in the 70's 80's with s.america crap loans etc it was realised that 'sales' were not king - sales come at a price - they comsume resources create risk and demand maintenance!! In such a large organisation the operations dept (back office) became the key to manageing and balancing profit (these days of course the cuts are very deep) but then we had it drummed into us that EVERY DOLLAR SAVED GOES STRAIGHT ON THE BOTTOM LINE every call every pencil every envelope - straight into profit . It may be difficult to imagine for a small framing business but bend your mind round it - i tell you i dont chase sales keep to my niche and am a happy bunny I would never again put together the kind of complicated banking deals (framing equiv) that i used to in the city - too dodgy!

[Not your average framer]

Hi Mickey,

I'm already operating in a niche market for a certain proportion of my total busness, but as this recession deepens I'm looking for meaningful ways of analysing and optimising the performance of my business and making it achieve it's full potential as this recession continues to tighten.

I am less worried by what I do know than what I don't know. Until now, what I did not know about accountancy / business management methods, systems and theory never crossed my mind.

Right now I'm thinking that this is of increasing importance and many businesses may need a little extra edge to survive this ongoing recession. I am currently trying to sharpen up my key business management knowledge and hopefully also gain more understanding of how to run a better more efficient business.

[Tim]

You could, of course, do what I did but it's a bit drastic.
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marry a management accountant

[A Few More Words]

KPI's for any business are very important - as one thing is for sure - What Gets Measured gets Done
It helps puts focus on the important things in a business, thus helping to drive it forward. It will allow a greater focus on output. Customers will only pay for output, not activity. At a minimum it allows vital comparisons within a business, but more importantly allows similar businesses to compare their effectiveness to the benefit of both.
While many businesses today are attempting to cut costs to the bone, I believe this approach , while necessary, may only partially improve their overall performance. Too much chasing costs will result in an internally focused mind while perhaps more effort is needed outside our four walls (and outside our normal comfort zone) More than ever its now time to work a bit more on our businesses than in our businesses. Efficiencies within the business need constant improvement but we also need to focus more on the most important element in our business - our customer !
Unlike most other businesses operating in the retail space, bespoke picture framers have a great advantage, particularly in the current climate. We are generally not flogging commodity product that can be directly compared and purchased all down the high street - we are creating something unique for a customer with a specific requirement. The customer is involved in the planning and design and is proud to take home the finished article and to wax lyrical about it to all admirers in their home. (referrals) In the current climate, the opportunity for this individualisation is even more important than ever as customers are putting more thought into their purchases and want something unique and something that will bring pleasure for years to come.. But it is our job and opportunity to make this happen.
We need inviting , well presented premises with examples of the diversity of our work well displayed to allow upselling as its a very visual business.
We need to promote ourselves and our capability and get more new customers. (eg networking / marketing / advertising / customer database etec etc )I believe efforts in this direction can give a good result and need'nt cost a fortune.
So while we may use KPI's for stock ratios and gross margin etc , output per framing day etc, equally important may be - number of queries / customer visits / average spend/ new customers / sucessful upsells/ customer satisfaction/ customer complaints etc etc.