A regular review of your balance sheet KPI’s will help you stay on top of your business.
By Serena Irving
What are the key performance indicators for your business? What do they tell you about your business?
In this article, we take a closer look at your balance sheet KPI’s with a series of questions that you should be asking regularly.
Bank (cashflow)
- Minimum cash balance – are you keeping the cash balance above your bank’s agreed limit? Aim to have a cash buffer in case there is an unexpected payment to be made.
- What times of the week or month is cash at its lowest? Can you smooth out your payments so that they fall more evenly throughout the period?
- Are you reconciling your bank accounts daily, so that all sales are correctly tracked to funds deposited? A retail client of mine took three months to discover that a staff member was stealing cash because the company wasn’t reconciling the bank deposits to sales reports regularly.
Term loans, overdraft facility and credit cards
- What interest rates and fees are you paying?
- What securities and guarantees are you giving?
- Can your bank give you a better deal by restructuring your loans?
- Are you able to pay your loan facility more regularly or increase your instalments to save interest and pay off your loan faster? Few banks will tell you this, as they want to maximise their earnings. My husband and I recently switched our home loan to fortnightly loan repayments, and increased the repayment amount by $107 a fortnight, saving us $26,700 over the life of the loan and paying off the loan seven years sooner.
Inventories
- What is your stock turnover per annum (cost of sales divided by average stock)? The IRD median benchmark for medium cafes and restaurants ($344k – $671k turnover) is 27 times. Aim for a high stock turnover by keeping inventories low and reducing wastage.
- Have you got the right mix of food and beverages?
- Overstocking leads to wastage and hidden holding costs, tying up funds and storage space. Do you have slow-moving inventories of wines? Review your purchasing decisions.
- Understocking leads to missed orders.
Accounts receivable (Customer balances)
- Are regular customers paying their accounts on time? Who approves a new account? What limits are on the account to ensure that the customer can settle without argument?
- How often do you review customer balances and follow up?
- Who is responsible for collecting deposits for functions and ensuring that the balances are paid when the function is concluded?
Accounts payable (Supplier balances)
- Are you able to pay your debts when they fall due? The current ratio (current assets divided by current liabilities) is one indicator. A current ratio below 100% indicates that a business could be struggling to pay its debts on time. The quick ratio or acid test (current assets excluding inventory divided by current liabilities) recognises that there can be a delay in converting inventory to cash, and ideally this should also be above 100%. The IRD median benchmark for medium cafes and restaurants ($344k – $671k turnover) is a current ratio of 41% and a quick ratio of 26%, well below the 100% ideal.
- Which suppliers must be paid first if cashflow is tight?
- Can you get better terms by paying by direct debit?
- Can you improve your cashflow by paying different suppliers at different times of the month?
- Can you spread larger payments over several months?
Monitoring these KPI’s regularly means that we can take action to address issues, before they become problematic and we can celebrate successes when they arise. Where there are variances, can they be explained by one-off events or is something more persistent? Don’t wait until the bank calls or your accountant prepares the financial statements for the year. The time to give your business a KPI health-check is now.
About the author. Serena Irving is from accounting firm William Buck Christmas Gouwland Limited, an associate member of the Restaurant Association. www.linkdin.com/in/serenairving