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The way a business achieves its goals and objectives will vary from business to business, however in having these goals and objectives clearly defined and in understanding the business’ current situation you will be in a better position to identify what steps are required to make the necessary adjustments to changing business conditions and environments.
Once a business has established its goals and objectives, and the action plans to achieve them, it is important that management constantly monitor the progress and performance of its business. Below is a 4-step strategy execution model to help achieve this:
Goals and objectives:
Where are you now? Where do you want to go?
Actions and Milestones:
What actions are required to achieve goals and objectives?
What strategies are required to be put into action and measured?
Monitoring the progress of your business' achievements against its goals and objectives.
The best way to monitoring the performance of a business achieving goals and objectives is through ratios analysis; which can be expressed as either financial or non-financial.
Financial ratios are predominantly used to analyse a business’ profitability and liquidity (applied to the business’ income statements, balance sheets and cash flow statements), to simplify financial statements and highlight results,
Non-financial ratios are predominantly used to analyse a business’ operational efficiency, which can vary and be specific to a particular business-type or industry, to simplify causal effects (i.e. one activity affecting another activity)
Successful business owners and managers understand the concept of profitability; where
Profitability = Productivity + Performance; where:
‘Productivity’ = Output over Input
‘Input’ = Investment of money, time, goodwill, service
‘Performance’ = Achievement of goals
Profitability can be assessed using a number of measures, including:
Gross Profit ratio = Gross Profit / Sales
The Gross Profit ratio measures the percentage mark-up of direct costs to sales revenue; represents the mark-up of costs to sales.
Net Profit ratio = Net Profit (EBIT)/ Sales
Net Profit ratio measures the percentage of net profit (calculated after deducting direct and operating expenses) to sales revenue.
Return on Equity ratio = Net Profit / Equity
The Return on Equity ratio (ROI) measures the percentage of net profits to the amount invested by the owners of the business.
Current ratio = Current Assets / Current Liabilities
The Current ratio measures the percentage of Assets to Liabilities, to assess a business’ ability to pay of short-term liabilities with its current assets (where ‘current’ refers’ to assets and liabilities receivable and payable over the next 12 months).
Quick ratio = (Current Assets – Inventory – Prepaid Expenses) / Current Liabilities
The Quick ratio measures the percentage of ability of current assets that can be converted to cash within 90 days or in the short-term (and therefore typically excludes inventory and prepaid expenses) to current liabilities, to assess a business’ ability to pay its upcoming liabilities when they are due.
Non-financial ratios relate to operational aspects of the business, to review things such as trends, comparisons to industry averages, potential risk areas, etc.
Examples of non-financial ratios include:
Sales proposals to gain new customers
Marketing campaigns to generate leads
Call-to-close (prospecting / calls to set appointments then appointments / conversion)
Productive hours to total available hours, by staff members or by unit of equipment
Wages / materials, as a proportion to completed goods
Staff turnover per year
Inventory turnover per year
Number of days to collect invoiced amounts
KPI’s provide a measurable value to demonstrate how effectively a business is achieving its key business objectives. i.e. KPIs measure specific aspects relating to the achievement of business goals.
Examples of KPIs include
Cash Flow achieved in a given period;
Gross profit as a proportion of sales;
New customers acquired, or lost;
Sales revenue growth;
Number of days to collect invoiced amounts receivable;
Number of days to pay supplier invoices;
Successful businesses understand how they are tracking to their goals, by measuring its performance against its goals and objectives, by tracking their KPIs.
From understanding how a business has been preforming and its current financial position, business owners and managers can gain a better understanding on where their business is heading, through forecasting.
Forecasting is the process of making predictions of the future based on past and present. The main forecasting techniques applied include:
Forecasting based on history, on the basis that history can provide a trend, to predict a potential outcome and;
Forecasting based on market conditions, taking into account changing conditions and assumptions to predict a potential outcome.
H&R Block can assist you with budgets, KPI-tracking and forecasting, to assist in analysing and reviewing your business, to help you make informed decisions.
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