Looking to drive business performance from good to outstanding? Here are some practical steps that you can take:
Measure and benchmark
Nigel Moore, consultant at Better Business Expert, says: “I would look at all their key performance indicators (KPIs) – so things like gross margin, labour costs per turnover, overheads – and then use this information to set a budget.”
The target gross margin depends on what type of business it is: construction firms should be aiming for about 22%, whereas hospitality’s is around 76%.
Owners should be monitoring these KPIs on a monthly basis. Without timely management of figures, it is very difficult to make well-informed decisions about the financial efficiency of your business.
Act on the information
When you have all the relevant data, big decisions are easier to make.
“If we look at labour costs to turnover in a solicitor’s practice, a solicitor should be billing around three to 3.5 times their salary,” says Moore. “If it is lower than this you have too many people who are not billing enough. In the down times, people aren’t looking to cut staff quickly enough.”
Boring, but essential
Naveed Choudry owns Lazaat Hotel in East Yorkshire. Five years ago he sought advice on how to manage it more efficiently.
“I realised if you don’t measure the boring stuff you are not in control of your business,” he says.
He now benchmarks things like labour, purchasing and energy to monitor how efficiently the hotel is performing.
He adds: “Labour costs were 50% of turnover when we started, but I didn’t know that because we weren’t measuring it. It is now about 37%. Gross margin was in the low 50s [%] and now it’s probably at mid-70%.”
Choudry has improved the hotel’s buying, and has planned the menus so there is less kitchen waste.
“It’s been a painful five years, but it’s worth it,” he says.
Show me the money
No business can survive without cash. SMEs must have a robust purchase order system in place to constantly review and monitor all procurement to ensure the company is getting the best deal, and to chase up unpaid bills.
Research by Bacs reveals that SMEs are owed £32.4bn in late payments. An additional £8.2bn cost burden is associated with time spent chasing late payments.
“Make sure your invoices go out on time and they are accurate. And then chase them up,” advises Bridget Holmstrom, founder of tuition and advice firm BH Financial.
Send a gentle reminder seven days before the bill is due to be paid, but follow up with a much stronger letter if it still not paid seven days after the due date.
“Small companies don’t like doing it, but you have to,” she says.
Watch cashflow
SMEs should map out a cashflow forecast for the year and update it each month. This is essential to help plan for future events.
“You can plot whether you will be able to bring in extra staff and buy more materials. I had one client who called it the ‘graph of doom’. It will help you identify when the money is going out and when it’s coming in, or when you are likely to run out of money so you can go to the bank to arrange an overdraft to cover that period,” adds Holmstrom.
Check out grants
Grants can be a huge help when purchasing large pieces of capital equipment, such as diggers or a new piece of machinery for a manufacturing line. But, they come with strings attached and higher cost items are linked to job creation.
Businesses that are bringing a product to market should investigate the possibility of claiming R&D tax credits.
“That’s a big hidden gem – so many SMEs don’t realise they do R&D,” Moore observes.
Take a strategic view
“I can now tell you what business we have booked in July 2016 – how many conferences and how many weddings,” says Choudry.
This allows him to plan menus and staffing well in advance. It also gives him time to focus on areas to improve.
“I can look at the quieter months (January and February) and work out how we are going to deal with those periods,” he adds. “This business is now strategic, rather than reacting to issues on a daily or weekly basis.”
So don’t sweep the boring stuff under the rug – embrace it, measure it and use that information to get your business fighting fit for the future.
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