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Formulate key business measures
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Measuring the performance of your business will tell you how things
are going, and will also tell you where any problems lie and even what to do
about them. In the past many companies have focused on financial measures such as
turnover and profit as key indicators of the performance of the business, but
increasingly companies are looking for a wider set of measures, including
things such as customer satisfaction and employee motivation to offer
information on growth potential and performance. Traditional measuresFinancial measures are
critical for understanding the health of any business, and they deserve your
attention. Key financial measures include:- turnover
- variable costs
- fixed costs
- gross and net profit.
- earnings (profit on ordinary activities after
taxation)
- working capital (money tied up in the business trading cycle
comprising stock, debtors and cash less any amounts due to
creditors)
Additionally, a number of financial ratios can be calculated, that
allow observers such as investors or the bank to compare your business to its
peers. Performance ratiosPerformance ratios indicate
the profitability of your business, allowing you to look beyond turnover and
examine the cost of winning new business and making sales. They include:- Return on equity: This ratio measures how much profit your
business generates relative to the amount of capital you and others have put
into it. It is calculated as profit after tax, divided by ordinary share
capital and reserves.
- Profit margin: This ratio measures how much of each sale goes
as profit, and is calculated as profit before interest and tax divided by
sales.
Financial status ratiosThese measures provide
you with information on liquidity of your business. They include:- Gearing: This ratio measures how indebted your company is, and
is calculated as total debt (long and short term) divided by capital
employed
- Interest cover: This ratio is used by lenders to evaluate how
easily you can make your interest payments on loans, and is calculated as
Profit before interest and tax divided by your interest expense
- Current ratio: This ratio measures liquidity, and is calculated
as current assets divided by current liabilities
Identifying Performance Measures for your
Business- Write down you business objectives. These should be clearly
outlined in your business plan
- Next identify a number of key steps that you need to take to
achieve these objectives. Do you need to attract more customers? Or reduce your
purchasing costs? Do you need to increase cross sales?
- Now you can identify two types of performance measures for your
business: results that will let you know how close you are to delivering your
objectives and drivers that will tell you if your current activities will be
enough for you to meet your objectives
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