As the operations of the company expand and sales revenue increases, it is important to monitor how money and profits change over time. Does profit increase linearly with sales revenue? How do costs change at the same time? Tracking your company’s numerical data gives you valuable information on how to grow your business and profits steadily. Establish an effective reporting system to keep up to date with key indicators.
There is no one-size-fits-all reporting. However, there are more common reasons to deal with management reporting. These reasons as well as needs are – how to grow faster, make more profit, control cash flows and manage company more effectively based on numbers. In this article we will focus on the first of them, i.e. we will explain in more detail how to support the growth of a company with reporting.
The goal – rapid growth
There are roughly three ways to increase sales revenue:
- sell to more numerous customers (find new ones and keep the existing ones)
- sell more times or
- sell more at a time.
Company growth formula:
All customers = (existing customers x stability rate = existing customers) + (potential customers x conversion rate = new customers)
Sales revenue = all customers x average number of transactions per year x average transaction size
To grow faster, you can address five topics:
- increase customer stability rates – how many existing customers will stay with you
- increase the number of potential customers – people interested in buying from you (result of marketing activities)
- increase conversion rate – how many potential customers will become your customer (sales result)
- increase the frequency of sales – the average number of transactions per year
- increase the average transaction size.
Choose one or more of them and create a solution that will increase your profit.
Which performance indicators to analyze?
To find the right performance indicators or KPIs, write down your last year’s sales revenue calculation with actual numbers. If you are missing any number (such as the number of potential or loyal customers), it is high time to start measuring these. Once you have drawn up your scheme, you will find “low hanging apples” or the parts that are relatively easy to improve.
One generalized case study of professional services company has been provided below.
Three service company metrics or KPIs were identified that could be easily improved.
- conversion rate, from potential customers to real customers (was: 50%)
- average purchase value (was: 1560)
- variable costs as % of sales revenue (was: 70%)
As the improvements required certain costs, the overheads slightly increased.
First KPI: conversion rate
The company had established the routine that the offers were made by the owner. The conversion rate was barely 50% that needed a significant improvement. To this end, a standard tendering procedure with a follow-up protocol was established. In addition, simpler bidding was delegated to specialists.
As a result of the change the conversion rate increased to 75%. The total number of customers increased by 5%.
Second KPI: average purchase value
The second KPI required to be changed was the average purchase value. This change was easy. The prices of various services were reviewed. Some of the latter were found greatly underestimated and their prices were raised. As a result the average purchase value increased by 5%, i.e. the new value was 1638.
As a result of these two changes (increased conversion rate and average transaction size) sales revenue increased by 10%.
|customers||X||per year||X||value||=||sales revenue|
What should the reporting include?
In order to regularly monitor the performance indicators or KPIs in the above example, the management report should include:
- brief income statement
- detailed analysis of sales revenue, especially as regards the growth formula of this company, focusing on the currently important indicators
- performance indicators (if possible, e.g. number of sales calls, website visitors, published articles, etc.).
Rapid growth is often accompanied by losses and “money burning”. Profit growth is much slower, but start-ups do not have that time, so they mostly raise money from investors. If your cash reserves are scarce, you should also carefully monitor the cash balance of your account so as not to get into payment difficulties.
In addition to the above-mentioned reports the following is required:
- cash flow budget
- actual cash flow statement with monthly budget comparison
If you need to have more control over your cash flow, be sure to read the article on cash flow management. If you wish to set up management reporting that supports rapid growth and is suitable for your company, then contact us! Robby&Bobby’s financial management services include cash flow management, budgeting and reporting, cost accounting, regular financial coaching and an annual review of the action plan and objectives.
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