With so many different measures of financial performance and so many different ways of analysing your business, it can be difficult to know where to start. To help you get to grips with your business performance we have put together six key measures that every director should be keeping their eye on.

1. Turnover

This is an obvious one really but turnover is the most basic measure of how your business is performing as it provides the simplest insight into sales. Be careful not to get into the habit of relying on turnover alone though as increasing turnover at the expense of other factors such as costs or credit control can actually lead to reduced profit rather than increase profit.

Instead of just looking at turnover from one month to the next, try instead to look at rolling quarters as this eliminates the impact of any unusually high or low months. Also, make sure to compare turnover to the same period in previous years as this will give a more accurate measure of performance as it will allow for any seasonality in your business.

2. Gross Profit

Gross profit is simply turnover less direct costs and provides a straightforward measure of whether you are maintaining suitable margins when making sales. You can use gross profit and margin analysis to see whether you are undercharging, over paying for goods or whether your production payroll is out of line with your sales. Ideally, you should never see your margins going down unless you have made a conscious decision to reduce them in order to win significant new work.

3. Overheads

Your overheads need to be paid whether you are making sales or not. Because of this, it is important to maintain tight control over them and to regularly review whether any savings can be made.

As overheads are generally fairly consistent, you should investigate any unusually high or low expenditure as soon as possible as you can quickly see your hard earned gross profits used up unnecessarily in meeting these.

4. Net Profit

This is the measure everyone in business is ultimately aiming to maximise and so should be your primary focus provided all other measures are being kept in check. By regularly reviewing your net profit, you can see how sales performance, direct costs and overhead controls are impacting your actual bottom line performance.

5. Debtor Days

It’s all well and good increasing sales, controlling costs and ultimately making a profit on paper but if customers aren’t paying their bills then you will never reap the benefit. You can keep a check on how well customers are paying by working out your debtor days. You can do this using the following simple formula:

Total value of outstanding debtors ÷ Turnover for the last 12 months to date x 365

This will give you a number which is the average number of days your customer invoices have been outstanding for. Based on this, you can see how well customers are adhering to your payment terms and whether your credit control function is up to standard and improving or worsening.

6. Cash

If all of the previous 5 measures are well managed then cash should take care of itself. Unfortunately, it is often the case that one or more of the other measures are not exactly where you need them to be. Because of this, we always recommend that you regularly monitor current cash levels and more importantly your cash requirement over the next few weeks compared with expected receipts. All too many otherwise viable businesses have failed as a result of not monitoring their cash flow well enough – don’t be one of them!

If you have concerns about your Company’s performance in any of the six key measures or your business is currently facing financial difficulties, why not call us free on 0800 066 3122 to discuss the options available to turn your business finances around.