Wouldn’t it be great if you could get a sheet of paper each week or month that tells you at a high level how the four most important aspects of your business were going? Most small businesses don’t have regular scorecard reporting they use to run their business. This is a shame because just a few small numbers from the accounting and finance department can help small business owners determine if their business is running smoothly or if potential problems loom.
Most business owners go through a couple of iterations of a scorecard because they don’t figure out at first what they really want to see. Their first scorecard might be too much information. Their next might be the wrong information. They go through a few until they finally settle on one that feels right. The best scorecards give you three to five data points (or key performance indicators, which we’ll go into much more depth in a later article) to help you know where you stand in the critical areas of your business. These aren’t necessarily financial or accounting metrics (although they can be). Rather, these are metrics that may be financial, operational or others that are important to the businesses success.
Below are 4 great examples of KPIs used in scorecards that might help you or your financial professional in developing a scorecard for your small business. As with most of our articles, we will not disclose the names of the businesses, but we will give you enough information to follow along.
- Kid’s Entertainment Business – Parties Booked
I thought I would start off with one of my own businesses and let you know two critical numbers we look at each week. Every Monday we look at parties booked the past seven days and parties slots booked the upcoming 3 weeks. We look at each of these numbers on a rolling three weeks.
Parties booked are a critical component in this business. They account for between 50% – 70% of revenue. As such, a key eye must be kept on them at all times. While one week to the next might have a fluctuation, we know that over a 3 week period, we should be holding and booking a certain amount of parties. This amount differs by season which we take into account.
It should be noted, this is not a financial or accounting statistic. Most scoreboard reports make use of at least a couple of operational statistics. Those operational statistics will eventually translate into an impact on the income statement. If you are using operational statistics that won’t eventually have an impact on the financial statements, odds are you are tracking something that isn’t important.
- Marketing Consulting Agency – Utilization and Scheduled Utilization
If you have a question about what utilization is, take a look at one of our previous articles. If you have a service business, odds are you might be tracking utilization. This is an important metric that can tell you among other things how much work you are doing (which translates into revenue and payroll).
While many service-based businesses do a good job of tracking historical utilization (a backward-looking measure), many don’t take the next step of looking at scheduled utilization. This particular marketing firm looked at scheduled/projected utilization on a weekly basis for four weeks looking out. This lets them know what their capacity is, if they have openings in their schedule and if they might need to make any adjustments.
The best scorecards will result in action that is vital to an organization’s success. In this instance, an organizational emphasis on the managers to be pro-active in scheduling. Managers were forced to be in contact with clients on a regular basis so they could better project out and schedule their resources (not to mention increasing customer service).
- Franchising Company – Lead Generation
Most good sales organization know their statistics like the back of their hand. One of the more important statistics is their conversion ratio. This is the ratio of leads they are able to eventually close with a sale. In franchising, the industry standard is that between 1-3% of leads are eventually closed and a franchise sale is made.
A franchising company that had never tracked their data before. They were a smaller company that had made 4 previous sales. As part of the process in developing their scorecard, they worked to accumulate all of their previous leads (which was hard because they were tracked over three different systems). When they were done accumulating this data, it turned out that they were actually closing on close to 4% of their leads that came in.
When they learned this, they figured that for every 25 qualified leads that came in, the organization was selling approximately 1 franchise. Over the previous 3 years, they had accumulated 110 leads. Once the organization made leads a priority and started to track them, two things started to happen. First, leads drastically increased. Over the next 12 months, the organization generated over 100 qualified leads. The other change was that the closing ratio dropped to 2%. This made sense because as the organization shifted its strategy to lead generation, the leads that came in were not as good. However, this didn’t matter since they sold 2 franchises over that 12 month period. They were ecstatic!
Good scorecards will force behavior that helps businesses grow. That is because what is generally tracked in companies will be emphasized and therefore determine behavior.
- Helium Gas Supplier – Average Days in Accounts Receivable
As a helium gas supplier in a major metropolitan area like Denver, this company had well over 500 customers that all had credit terms with them. Most of the customers received deliveries at least monthly, and many received them more frequently than that. The company would bill with each delivery giving most customers 30-day terms. The company had a headcount of one and a half employees dedicated solely to billing and collection of accounts receivable. The company easily billed over $200,000 per month to its customers, mostly in small amounts.
Collection of accounts receivable was vital to this company. As such, the owner looked on a weekly basis at two numbers that dealt directly with accounts receivable. The first was the percentage of customers with balances over 45 days due. They picked this because based on history, most customers paid their accounts between 15 and 45 days. In their history, customers that were beyond 45 days overdue on their accounts were trouble and may lead to uncollectable balances.
The second was average days in accounts receivable. It was vital for cash flow reasons that this number stayed below 30.
As illustrated, good scorecards keep owners informed about the metrics and areas of their business that matters the most. Scorecards should not provide so many KPIs that it inundates owners and doesn’t lead them to action. However, they should provide small business owners with enough data to efficiently and effectively run their organizations.
If you would like to discuss scorecards or other strategies that can help grow and manage your business, contact us now. Our phone calls are always free, so contact us so we can talk about your small business today.