Business New Year Series Part 3: How to Analyse Business Performance to Reach Your Goals
Once you’ve set your SMART business goals (part one of this series) and have your KPI targets in place to measure your progress (part two of the series), the final step towards achieving your goals is to analyse your performance.
This analysis should identify any corrective action that may be necessary, such as a change in strategy or resource allocation.
Here are our top 3 tips to help you analyse your business performance.
Tip 1: Compare your actual performance to your KPI targets
If your business performance has met or exceeded a KPI target, you are well on your way to achieving the associated SMART goal.
If you have significantly exceeded a KPI target, you may want to consider revising its associated goal upwards in an attempt to boost your performance further. However, if you do, just make sure that the revised goal is still achievable (one of the five characteristics of SMART goals).
On the other hand, if you haven’t reached a KPI target, it’s essential to identify why you haven’t. Potential reasons could include:
- The wrong strategy is in place to meet the target (and if so, a revised strategy should be developed and implemented as quickly as possible).
- The right strategy is not being appropriately executed by staff (and if so, corrective action should be taken to address the poor execution).
- A change in market conditions (which may require the SMART goal to be revised downwards to reflect the changed conditions).
- The goal initially being overly optimistic (i.e. not realistic and therefore not a SMART goal in the first place).
As you can see, once you identify the reason why you haven’t hit a KPI target, you can take appropriate corrective action.
Tip 2: Identify any relevant trends across your business performance
When analysing your business performance, it’s a good idea to break your analysis down into three categories:
- financial performance (e.g. sales, profit and cash flow KPIs).
- Employee performance (e.g. productivity KPIs).
- Customer performance (e.g. KPIs on the number of repeat versus new customers).
All of these areas will affect your overall business performance, so it’s important to identify both positive and negative trends in specific areas of the business that may be influencing performance in other areas. When you do, you can take appropriate action.
For example, if you are tracking well against your financial KPIs, you may be able to:
- Grow your business faster than you had initially planned.
- Reward your staff to further increase their motivation to perform.
On the other hand, if the business isn’t attracting enough new customers to hit your financial performance targets, you may be able to implement strategies such as increasing your marketing/advertising budget.
Similarly, if employee performance isn’t reaching the desired levels, you may be able to source finance to invest in equipment to help your staff improve their productivity or get them some appropriate training.
Tip 3: Use financial ratios to benchmark your performance against your competitors
There are five categories of ratios to measure different aspects of business performance. In each of those five categories, there are a vast number of different ratios to use.
They include:
- Profitability ratios. For example, gross profit margin and net profit margin.
- Liquidity ratios. For example, current ratio and quick ratio.
- Efficiency ratios. For example, inventory turnover and accounts receivable turnover.
- Valuation ratios. For example, earnings per share and price to earnings ratio.
- Leverage ratios. For example, debt to equity and return on equity.
Formulae for some of the popular ratios:
- The quick ratio (your current assets minus your inventory, divided by your current liabilities).
This ratio demonstrates your ability to meet your short-term business debts with your cash flow. Your liquidity ratio should at least be higher than 1, and ideally between 2 or 3 (depending on your industry).
- The debt-to-equity ratio (your total liabilities divided by owners’ funds).
This ratio demonstrates how much of your business is funded by owner investments (equity) versus borrowed funds (debt from lenders). Your debt to equity ratio should be no higher than 2.
- The net profit margin (your net business income after expenses divided by total business income).
Net profit ratios vary by industry but ideally shouldn’t be much lower than 10%. Obviously, the higher the ratio, the better. You should measure all of these key financial ratios when analysing your business’ performance and compare them to industry benchmarks and your goals.
With a solid set of KPIs aligned to your business goals, analysing your performance using ratios and data analysis will keep your finger on the pulse of your business success. When you’re periodically comparing your results to your KPIs, you’ll be in the best position to catch any threats to your success as they arise. Which in turn gives you the power to redirect your business.
We hope you’ve enjoyed our three-part Business New Year Series, and we wish you and your business all the success for 2024 and beyond.
We specialise in flexible finance solutions for businesses of all shapes and sizes. If you’re interested in learning more about Earlypay, and our Invoice Finance, or Equipment Finance, feel free to get in touch to learn how we can support your business along your journey to success.
