Identifying Your Key Business Drivers

Key business drivers are resources and activities that drive the operational and financial performance of the business. Identifying and monitoring the key drivers of your business will help you track what’s happening and trigger red flags for when remedial action is needed. While a whole range of internal and external factors can affect the performance of your business, you should focus on a handful of key drivers that:

• Reflect the performance and progress of your business.

• Can be measured.

• Can be compared to a standard.

• Can be acted upon.

Sales or revenue is one indicator that is easy to monitor. But sales might not be the actual driver for your business. The driver could instead be the number of sales calls you make, your follow-up service campaign or the amount of traffic that hits your website as these are the measurable drivers that help you generate sales.

Benchmarking

Use your historical figures (such as a budget or last year’s figures) as a benchmark for your current performance. Past figures provide hard facts and established patterns for your business while also identifying potential problems and opportunities. In addition to your internal benchmarking, compare your business with similar businesses in your industry.

Key Drivers

The range of business drivers varies enormously from business to business. For example:

• Sales leads in a capital goods or service business

• Sales per market in a retail business

• Machine downtime in a factory

Even direct competitors may use different drivers than yours. For example, prime location is not a key driver for an internet-based business, but it might be for a brick and mortar competitor that relies on well-located retail stores to attract foot traffic. Here are some drivers that could be relevant to your business.

Online presence

The volume of online activity can be a key driver if your business relies on the internet. Increases or decreases in web traffic, online inquiries and social media followers or activity are all easy to track and compare month-to-month.

Your inventory levels

Good stock control allows you to keep relatively low inventory levels while still keeping customers happy.

Your stock turnover rate is the ratio of cost-of-sales to stock. Most businesses aim for a high stock turnover rate because it indicates an efficient use of capital resources. If the ratio decreases, you may be overstocking or purchasing stock that you can’t sell. Break down your stock figures into separate product categories to make it easier to pinpoint problems.

Inquiry levels

Inquiry levels (the number of leads/quotes given) can provide an early warning of peaks or troughs in your sales. If you have an established conversion rate (the ratio of leads to sales) and know the size of an average sale, you can use the inquiry level to forecast turnover.

When you review sales, monitor:

• Where leads come from to understand which marketing efforts work.

• Which categories of product are selling well.

• How your priority products (those with the best margins and the best payment terms) are selling.

• Changes in conversion rates.

Your costs

Like sales, costs (and therefore profit margins) should be monitored frequently, ideally every week. Focus on your key variable costs and what causes them to increase or decrease. Maintaining a healthy gross profit margin is critically important. If your margins are falling, work to pinpoint why this is happening so you can take corrective action. The cause could be any number of things, such as higher material costs, a changing product mix, production inefficiencies or offering too many discounts.

Collecting debts

If you have overdue debts, this could pose an issue, especially if any of your customers are likely to default and leave you out of pocket. If your debtors’ book is large and bad debts could place your whole business in danger, then it’s a key driver to monitor. Monitor your debt collection system and implement necessary improvements immediately.

An effective way to control debtors is to produce an aged list of debtors every week, showing which bills are overdue and by how many days. Any payments that are overdue, or simply large, should be highlighted and tracked so you can take prompt action. Be consistent—late payers should know that you will continue to contact them.

“Soft” and indirect drivers

For most businesses the key drivers include major costefficiency items, but drivers often include “soft” factors. For example, effective networking (the ability to build new business relationships) has proven to be a key driver for new or small businesses.

The measurement of drivers is sometimes indirect. For example, if you have identified employee morale as a driver, you could monitor it by tracking voluntary overtime, absenteeism and sick days. The drivers may change with time due to the growth of your business, changes in your market or simply seasonal changes.