LIES, DAMN LIES, AND STATISTICS

The term above term was popularised in the United States by Mark Twain (among others), who attributed it to the British Prime Minister Benjamin Disraeli:

“There are three kinds of lies: lies, damned lies, and statistics.”

While (per Wiki) the phrase is used to describe the persuasive power of numbers, in the form of statistics, used to bolster (often weak) arguments, the reality is that there is always a nub of truth within those numbers. An article in Forbes magazine in 2015 noted that 90% of start-ups fail. Two years earlier the same magazine said that 80% of businesses fail within the first 18 months. Other (U.S.) articles say it’s 80% fail within 20 years, 70% within10 years, and 50% within 5 years.

Regardless of which numbers are correct, it doesn’t have to be that way. It all comes back to measuring and improving results.

As Peter Drucker said:

But a business is able to measure performance and position, so it can improve, it can succeed!

Not only that, they need to ensure these KPI’s are kept up to date and reviewed both frequently and regularly. This means putting in place systems to capture the necessary data and report the results in a timely fashion.

Many of these KPI’s are related to the financial results, which should also be reviewed frequently and regularly. It should be noted that:

(I’m not sure where this statistic came from but, even if it’s half that number the 30% is far too many businesses, far too many lives, far too much waste.)

So what are those KPI’s? Let’s look at the common financial KPI’s first.

Income Statement (Statement of Financial Performance) KPI’s

1. Sales Growth = Total Sales this period ÷ Total Sales last period. This measures the increase in Sales from over the previous period.
2. Gross Margin — as discussed this is Gross Profit ÷ Sales as a percentage. Over time a business would want this ratio to be improving, or at least stable. Different industries will have different ‘norms’ for this ratio. For example, a supermarket would have a much lower margin than a corner store.
3. Burn Rate — Operating costs per week/month/year. This is a good guide for what minimum gross margin must be achieved per period.
4. Operating Costs (a.k.a. Opex) to Sales = Operating Costs ÷ Sales as a percentage. The lower this ratio is, the better — of course!
5. Net Margin — as discussed this is Net Profit ÷ Sales as a percentage. This is sometimes called the Operating Profit Margin.

Remember, too, that it’s also the pattern we are looking for — are the results heading in the right direction (improved margins for example).

Balance Sheet (Statement of Financial Position) KPI’s

1. Working Capital — simply, this is Current Assets less Current Liabilities.
2. Current Ratio = Current Assets ÷ Current Liabilities. Needless to say, you want the resulting number to be greater than 1.
3. Quick Ratio (sometimes called the Acid or Acid Test Ratio) — this is a refined version of the above ratio, and is calculated as (Cash at bank + Accounts Receivable + Short-Term Investments) ÷ Current Liabilities. A result less than 1 means the business cannot pay its bills. Ideally, this should be in the 1.5 to 3 range.
4. Cash Ratio — this is the most conservative of the Liquidity Ratios (which include the two ratios above), and is calculated as Cash ÷ Current Liabilities.
5. Return on Equity = Net Profit After Tax ÷ Total Equity. This is an indication of the return on the investment of the owner(s).
6. Return on Assets — similar to the above, this is Net Profit After Tax ÷ Total Assets.
7. Debt to Equity Ratio = Total Liabilities ÷ Total Equity. Where this is high, it reflects that growth is being funded by borrowing.
8. Account Payable Turnover = (Purchases + Expenses) ÷ the average of Accounts Payable over the period (*). The result is the number of days it takes for Accounts Payable to be paid by the business.
9. Accounts Receivable Turnover — similar to the above, this is Sales ÷ the average of Accounts Receivable over the period (*). This result is also the number of days — this time the number of days it takes for Accounts Receivable to pay the business.
10. Stock Turn = Cost of Goods Sold ÷ Average Stock for the period (*). Once again, the result of this ratio is a number of days — the number of days of stock held. The lower this is, the less cash is tied up in stock.

(*) Simply, this is (the opening balance + the closing balance) ÷ 2.

Once again, we are looking for a pattern of improvement.

Non-financial business KPI’s vary greatly, depending on the business/market/industry. Common ones include:

1. Staff Turnover, sometimes called churn. This is a measure of how happy staff are with their roles and the business. While some churn is a good thing — for introducing new ideas to the business — you really want it kept to a minimum, so your customers have the stability of dealing with the same people. The formula for this measure is to divide the number of employees who left during the period by the average number of employees for the period.
2. Lead Conversion. This requires keeping track of the number of potential customers the business has, and recording the success across the period of attempts to convert them to customers.
3. Quote Conversion. A similar measure to the above, this means we keep a tally of the quotes provided, and the number which becomes
4. Order backlog. This gives an idea of the possible results for the coming month(s). Depending on the standard turnaround of products from order to dispatch, you don’t want too long a queue (because you don’t want to keep customers waiting). However, some queue at least provides a little comfort. If the queue gets too long, this highlights potential issues:
5. That your production team needs additional/better resources (because sales are outstripping capacity), or
6. That your logistics/supply team need additional/better resources because it’s their ordering that is not keeping up, or
7. That the production and or logistics team need more training. The staff turnover KPI might also assist in understanding this.
8. That the sales team is selling too great a percentage of non-standard items (in which case you will want to ensure they are getting a good price — and therefore margin — for these items, to cover the additional hassles), or
9. That the items in the queue need some redesign to make them easier to manufacture.
10. Foot traffic. This measure records the number of customers coming into a store. Taking foot traffic per day with the sales per day, a measure can be established to see the average sale per visitor. If the store is in a mall, and it also records foot traffic, it is then possible to see what percentage of mall traffic visits the store.
11. Related to the above is the average sale (sales value, divided by the number of sales transactions). Using this, and knowledge as to which salesperson is achieving the best average (and how they do this), training can be developed to :
12. Get more store visitors to buy,
13. Get customers to buy more, each time.
14. Margin per sale. This can also be related to the above. Once again, training can be implemented to assist salespeople to maximize margin per sales — for example giving away something that doesn’t cost too much but has (say) $40 retail value, costs the business a lot less than simply giving the customer a $40 discount.
15. Margin per product. This is the kind of data that shows which products are delivering the best profit. While some lower-margin items might be necessary (as complementary items, or complimentary items), this information enables some streamlining of the business’ product offering. Training may also be given to direct salespeople to sell the better margin products.
16. Margin per supplier. This reveals to the business which supplier’s products are those that produce the best product. Once again, this knowledge can assist with the rationalization of stock holdings.

As with financial KPI’s, each of these is a measure in which the business owner would want to see improvement over time. They would also want to keep on top of them on an ongoing basis, so their business doesn’t become a statistic.