how to do business

 

How to Plan and Grow your Business

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Business Metrics

Assets profits and creating value

 

If you are building a company to sell on you need to be able to measure how much you have created on an on-going basis. Even if you don't want to sell, you owe it to yourself to know how you're doing.

In today's world intangible assets make up the greatest part of the net worth. Plant, buildings, vehicles and equipment represent only about 15%. The rest is formal IPR, customer relationships, operating procedures, cash in the bank and what's in people's heads.

But how to quantify and put a value on all this - and know whether you're going forwards or not?

Balanced Score Card

One way of producing a useful ready reckoner is to follow the balanced score-card approach. This essentially helps you benchmark your business according to 5 focuses.

  • Innovation
  • Staff satisfaction
  • Customer satisfaction
  • Operational efficiency
  • Financial health.

Fortunately for us in in the UK, once upon a time, a grateful nation paid Cranfield to benchmark a lot of potential measures and indicators for small businesses. I thought it would be a good idea to take it apart and put it back together again picking the 2 easiest indicators to measure in each category. This first saw the light of day as part of an EU project which ended up as our Grow Your Business Programme. The list of indicators is here.

Benchmark data

We chose these based on ease of getting at them and the amount of information they reveal about the holistic development of the business.

The innovation indicators (plus one of the customer measures) track how much the company is focused on developing and reaping the benefits of new products. One of the staff indicators tracks how well the skill base is being developed. The other is a painless way of tracking the morale of the staff (another easy one is accidents). The customer measures are operational. We would also recommend tracking the efficiency of conversion of enquiries into sales - in some detail actually.

The systems indicators measure efficiency - we have chosen 2 generic ones here - but some business specific ones are needed too. We need to focus on how good we are at taking cost out of the system as well as how much value we add and how long it takes us to get the money in.

The easiest way to keep the debtor days low is to ask for payment in advance. You might not always get it - but if you can it means your suppliers - rather than you or the bank - are funding the business.

In terms of financial measures pretax profit is important - but so is gross margin. Return on Capital employed is critical to know - if you're making less than 8% you're probably destroying value given the rates of interest and inflation. These figures show that more than 25% of UK companies were destroying value in 2004. Finally the acid test ratio tells you how good your liquid assets to money owed ratio is. Its a measure of solvency - if its greater than 1, your business is probably quite robust.

Finally you should track the value of your intangible IPR. There are various ways of capitalising this.

Contact us for more details on 0845 094 0407 or sign up for our newsletter .

A bit about me.

Dr Alan Rae

My name is Alan Rae. I've set up and run 4 companies since 1981 and now I'm chairman of our family horticultural business. I teach entrepreneurial marketing courses at a couple of business schools and give business advice to many small companies based on my own experiences and those of the many other companies I've worked with or done research for.

You can find out more about me here on this site , here on my own site, or on Linked-In.

 

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Contact - To discuss how we can help with your business growth or marketing ring 0845 094 0407

 

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