Business matters Key Performance Indicators

Key Performance Indicators

By Carol Gordon, CPA

What’s Normal? How many times in the last six months have you heard people talking about things “going back to normal? In order to recognize when things are back to normal, you need to know what normal was in the first place.

I met a barn owner who, when new boarders arrive at her barn, asks them to provide current TPR (Temperature, Pulse and Respiration) readings for their horse. And if they don’t know how to get those readings, she teaches them. The readings are included on the horse’s stall card and are updated semi-annually. She does this for several reasons. If the owner is not present and the horse is in distress, she can take the readings herself and has a “normal” to compare them with in her conversations with the vet. And if the owner is present and calls her because her horse “just doesn’t look right”, she can ask them to provide the current and the “normal” readings to her before rushing out to the barn. If I asked you for the “normal” TPR for your horse, you either know them off the top of your head or can get them in a heartbeat (pun intended!). TPR gives you a good, quick indication of the health of the horse. But what about your business? Whether you are an instructor, have a boarding barn, are a judge or some other equine-related business, you need to periodically take your business’s TPR.

The business equivalent of TPR is KPI – Key Performance Indicators. Keeping close tabs on your business’s financial performance is essential to long-term success. Many business owners will simply check their income statement or tax return at the end of the year to assess their company’s bottom line. However, it is important to look beyond these basic measurements to ensure you are getting the full picture of your company’s well-being. By understanding additional financial metrics and key performance indicators (KPIs), you’ll be able to make better informed decisions for your business.

Four critical KPIs:

A. Cash Balance/Cash Flow:

Your cash balance is the cash received minus the cash paid out during the time period – to arrive at these numbers, you should be reconciling your bank account on a monthly basis. Cash flow measures the ability of the company to pay its bills. A low cash balance can serve as a red flag that your business is spending more than it’s earning OR that you aren’t collecting what’s due to you on a timely basis. It is crucial for businesses to keep a healthy cash balance in the bank to address any unexpected expenses or situations or in cases of businesses subject to seasonality. According to a U.S. Bank study, 82 percent of business failures are due to poor cash management.

You can improve cash flow by using the following strategies: 1. Having customers pay you faster (offering discounted terms for early payment). 2. Having customers pay upfront (offering a package of lessons). 3. Paying bills slowly. 4. Reduce any discretionary spending.

B. Accounts Payable:

Accounts Payable are bills that you owe to your suppliers/vendors but haven’t yet paid. It’s important to keep track of everything that you owe so you can manage cash flow. Just because you haven’t received the bill from the vet yet for that emergency visit doesn’t mean that you shouldn’t consider it when you are determining Accounts Payable. You may not know the exact amount but you should use a reasonable estimate for purposes of determining future cash requirements. OFFICIAL FOOTING SUPPLIER OF THE AMERICAN RIDING The secret is in the sand INSTRUCTORS ASSOCIATION! www.ggt-footing.com

C. Accounts Receivable:

Accounts Receivable is money owed to your business by customers for business products and services. Even if you haven’t emailed your monthly bills to customers, you should be able to guess-timate what’s due to you. (Another way to improve cash flow is to send your bills to clients more quickly or more often).

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D. Net Profit:

Net Profit is the “bottom line” for your business – how much profit or loss did your business produce in a specified period. Net profit is usually calculated on a yearly basis for tax purposes. But in order to be able AD Amanda ARIA.indd 1 to make timely decisions, it’s much more helpful to calculate net profit on a quarterly or monthly basis.

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It’s really useful to calculate the bottom line as both a dollar value and as a percentage. For example, for 2019, Smith Riding Academy had income of $250,000 and expenses of $225,000. The net profit was $25,000 and the profit percentage was 10% ($25,000 divided by $250,000).

If your business records are kept current on an accounting software program such as QuickBooks, running reports to provide you with these KPIs are just a few clicks away.

Reviewing KPIs on a regular basis is a good way for you to evaluate your business. You can try out different options before actually implementing them to see if they make sense for your business (e.g. – you want to add coaching at shows but to do so, you need to hire an additional groom to do the grooming that you usually do yourself).

Just like reviewing your horses’ TPR on a regular basis, reviewing your business KPIs helps to keep your informed and prepared.

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