KPIs to help you plan for the cost of business crisis

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Accountants are under pressure to forecast more accurately and in greater detail to help businesses survive.

Since the COVID-19 pandemic, economic and market uncertainty mean finance teams are looking at their finances more strategically. Scenario forecasting and crisis planning have become essential tools for businesses of all sizes. Some accountants have noticed an increase in clients requiring these kinds of services, including those that previously operated from tax bill to tax bill.

Key performance indicators (KPIs) are essential components in forecasting and allow accountants to measure business performance and predict future scenarios. Typical KPIs may include:

  • forecast accuracy or forecast error
  • working capital
  • operating cash flow
  • debt to equity ratio
  • customer acquisition to lifetime value

We asked accountants for their favourite go-to KPIs when it comes to planning and forecasting. Here’s what they told us.

Favourite KPI: debtor days help manage cash flow

Sam Mitcham, SJCM Accountancy

Many of my clients are now asking for cash flow planning and forecasting services. They don’t necessarily know what they’re asking for, but when I translate it for them, that’s what their needs amount to. They might ask: “what is my VAT bill likely to be next quarter if sales continue at this level?” or “If XYZ happened, what would my cash flow situation look like?” I saw this trend a lot during the pandemic – clients wanting to know what’s coming up. Previously, small business owners tended to live from tax bill to tax bill.

Clients are now asking for services that they previously weren’t interested in. They’re starting to think much more strategically and looking into future-proofing. It’s brilliant because it means we can plan together and ensure a more secure future.

My favourite KPI for this purpose is tracking debtor days. So many businesses let their customers get away with paying late and this can easily become habitual and therefore have negative impacts on cash flow management. Debtor days is an important measurement to ensure cash flow security.

Verdict: Late payments can become habitual and can have a negative impact on cash flow. A debtor days KPI can help tackle this.

Favourite KPI: gross profit and working capital are good measures for manufacturing and retail businesses

Clare Bowen, Director, Monahans

Businesses are much more open to scenario planning than before given the turmoil and rapid changes we have seen over the last three years. They know that a business with a flexible approach to change, that can create a survival plan for the worst-case scenario is going to fare better in the long run than a short-term, reactive business.

Our task of ensuring businesses have financial contingency plans in place is made easier now that business owners understand that, since you can never see what’s around the corner, having a plan is always beneficial.

My favourite go-to KPIs hugely depend on the type of business. For a manufacturing or retail business, gross profit is the figure we start with to ensure that their rate of sales provides enough GP to cover overheads. But then working capital is needed to allow the bills to be paid. Sales without income are of no use in paying the bills.

Our job as accountants is to see the picture of a business that all KPIs give, identify the weaknesses, and correct them.

Verdict: Accountants need to make use of many KPIs to give a full picture of business performance.

Favourite KPI: Use a blend of financial and non-financial

Mahmood Reza, Founder Pro Active Resolutions

I am doing more one-to-one business financial forecasting and cash planning with clients these days.  Having a plan has many financial and non-financial benefits, and also reduces stress and anxiety since business owners get more clarity and certainty as to what the future looks like.

When things are hitting the fan and you are looking at crisis planning, then your most effective KPIs are a blend of financial and non-financial.

Financial KPIs

  • Cash is that commodity that will keep your head above water, it’s your business life jacket. Ignore revenue, it’s called a vanity measure for good reason.
  • Cash balances: you need to have up to 13 weeks’ minimum net operating cash flow. If customers don’t buy, you have a three-month safety cushion.
  • Profitability and gross profit margins are your friends. Monitor and manage them, this is what covers your running costs.
  • Break even: This gives you a sanity check and a target to aim for in terms of what you need to sell to cover costs, which is a good milestone.
  • Working capital cycle, this is your business ATM. It’s made up of debtor collection in days, plus stock turnover in days, minus creditor payment periods in days.

Non-financial KPIs

  • Website conversions: if you are getting decent web traffic, you want to see how many people are engaging.
  • Average spend per customer and frequency: this highlights loyalty and customer behaviour.

Verdict: The most effective KPIs are a blend of both financial and non-financial ones, including gross profit margins, profitability, working capital cycle and website conversions.

AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.

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