04 Sep Labor Day – Celebrate Your Success
Meaning of Labor Day
According to the Department of Labor, “Labor Day, the first Monday in September, is a creation of the labor movement and is dedicated to the social and economic achievements of American workers. It constitutes a yearly national tribute to the contributions workers have made to the strength, prosperity, and well-being of our country.”
Small Business
According to the Small Business Administration’s 2010 census report there were over 27.9 million small businesses (defined as businesses with less than 500 employees) which make up 99.7% of businesses in the United States. Additionally, there are over 19 thousand businesses with over 500 employees. These statistics are quite astronomical when you think about the public measuring success of business results based on the Fortune 500 results alone. The very foundation of Labor Day started with the independent business owner supporting their families through hard work, grit and determination. Their prosperity was a result of community involvement, support of local residents, based on fair and ethical business practices.
To help small businesses remain successful and prosperous consider the use of two basic tools, a balanced scorecard and key performance indicators to compliment and support your business vision, mission and strategic plan.
Balanced Scorecard (BSC)
A company can use a balanced scorecard to identify their key business indicators for performance measurements. The Balanced Scorecard (BSC) is a great tool to help businesses focus on their overall business performance as it relates to their mission, vision and strategic plan. The BSC uses four quadrants: Financial, Customer, Internal Processes and Learning & Growth. Each quadrant serves a specific focus area and defines the key measures for success for your company.
- Financial: this perspective views organizational financial performance and the use of financial resources
- Customer/Stakeholder: this perspective views organizational performance from the point of view the customer or other key stakeholders that the organization is designed to serve
- Internal Process: views organizational performance through the lenses of the quality and efficiency related to our product or services or other key business processes
- Organizational Capacity (originally called Learning and Growth): views organizational performance through the lenses of human capital, infrastructure, technology, culture and other capacities that are key to breakthrough performance
Now don’t let this graphic intimidate you. If you really look at it, the concept is really quite simple. The BSC lays out your business strategy in one page linking all of your key business information together. The document becomes a simple method of explaining to your staff, your financial institutions, and to shareholders what the business vision, mission, strategy, and focus is for the business. The aligned concept helps to ensure everyone is working on what is value-add to reach the goal. Helps them question themselves, “Is what I’m doing right now in line with what has to be accomplished.”
To remain ‘balanced’, the selection of the right performance measures for your company is vitally important to the continued success of your business. Below are some basic financial indicators to select from. The list is not meant to be all inclusive, however they can give you insight into your business by using a basic set of financial statement information.
Key Performance Indicators (KPIs)
A good compass for small businesses is to pay attention to key business performance indicators. A whopping, 82% of businesses fail because they of cash flow (working capital) problems. I am not talking about looking at your bottom line, you can be profitable but have no cash for operating a business. For example, if your invoices to your customers are not paid until after you pay your suppliers you will be sending out money quicker than it is coming in.
There are hundreds of key performance indicators. Businesses can define what measures are most important for their specific business, however here are 10 financial measures to get you started. I have added one additional one for those businesses who have inventory.
- Debt to Equity: The debt-to-equity ratio, is a quantification of a firm’s financial leverage estimated by dividing the total liabilities by stockholders’ equity. This ratio indicates the proportion of equity and debt used by the company to finance its assets. The formula used to compute this ratio is: Total Liabilities / Shareholders Equity
- Working Capital: The working capital ratio is a liquidity ratio which estimates the ability of a company to pay back short-term obligations. This ratio is also known as current ratio, cash asset ratio, cash ratio, and liquidity ratio. A higher current ratio indicates the higher capability of a company to pay back its debts. The formula used for computing current ratio is: Current Assets / Current Liabilities
- Quick Ratio: The quick ratio, also referred as the “acid test ratio” or the “quick assets ratio”, this ratio is a gauge of the short term liquidity of a firm. The quick ratio is helpful in measuring a company’s short term debts with its most liquid assets. A higher quick ratio indicates the better position of a company. The formula used for computing quick ratio is: (Current Assets – Inventories)/ Current Liabilities
- Return on Equity: The return on equity is the amount of net income returned as a percentage of shareholders equity. Moreover, the return on equity estimates the profitability of a corporation by revealing the amount of profit generated by a company with the money invested by the shareholders. The return on equity ratio is also referred as “return on net worth” (RONW). Also, the return on equity ratio is expressed as a percentage and is computed as: Net Income/Shareholder’s Equity
- Net Profit Margin: The net profit margin is a number which indicates the efficiency of a company at its cost control. A higher net profit margin shows more efficiency of the company at converting its revenue into actual profit. This ratio is a good way of making comparisons between companies in the same industry, for such companies are often subject to similar business conditions. The formula for computing the Net Profit Margin is: Net Profit / Net Sales
- Payroll as a % of Gross Sales: Payroll as a % of Gross Sales helps an organization understand the balance between having the ‘right’ amount of employees to support the business. A sound goal is to keep company payroll percentage between 30-38 percent of gross sales. If your payroll costs you as much as 50%, you may find yourself struggling frequently. This is only one expense indicator and a company should look at their overall expenses. The formula for computing Payroll as a % of Gross Sales is: Payroll Expense/Gross Sales
- Revenue per Employee: Revenue per Employee is a measure of how efficiently a particular company is utilizing its employees. In general, relatively high revenue per employee is a positive sign that suggest the company is finding ways to squeeze more sales (revenue) out of each of its workers. The formula for computing Revenue per Employee is: Revenue/# of Employees
- Cost (Expense) per Employee: Cost per Employee is a measure of how much expense the company generates by employee. In general, relatively high expense per employee is a measure to find ways to decrease the amount of cost through improvement ideas from each of its workers. The formula for computing Net Worth is: Total Expense/# of Employees
- Net Worth: Net worth shows financial health because it accounts for both assets and liabilities. Net profit alone will not give an accurate picture of financial health. By factoring in expenses, taxes, and debts, a company can compare what it owns to what it owes. The formula for computing Net Worth is: Assets – Liabilities
- Debt-to-Worth Ratio: The debt-to-worth ratio shows how dependent the company is on borrowed finances compared to the company’s own funding. It compares how much you owe to how much you own. The formula for computing Debt-to-Worth is: Total Liabilities/Net Worth
- Inventory Turnover Ratio: The inventory turnover ratio is an efficiency ratio that shows how effectively inventory is managed by comparing cost of goods sold with average inventory for a period. In other words, it measures how many times a company sold its total average inventory dollar amount during the year. The formula for computing Inventory Turnover is: Cost of Good Sold/Average Inventory.
Celebrate
Today celebrate what you have accomplished in your business. Dream about the future and think about what will be needed to take your business where you want it to go. Dreams are free, it’s the journey (and investment in the future) which has costs associated with it. If you feel you don’t have the time or the skills, call Leading to Unlock to help you with the development, planning, and execution. We offer customized pricing to fit your needs and your budget.