We’re now settled into 2010 after the business ups and downs over the Christmas and New Year period. It’s time for us all to take a step back, at least for a short period, to work on our business and not just in it. This is of course easier said than done but in this edition I will try to give a few tips that may help.
Metrics is what I want to discuss now –more specifically how to measure a business and different aspects thereof, not just to see how much profit you’re making. The more you can measure and analyse performance of the business the more you can control and direct it – to either get more profit, or allow you to have more time off…. or whatever it is that motivates you to work in the first place.
Key Performance Indicators (KPI’s) are what we all use to tell how well something is going – metrics are those KPI’s which we can, and do, measure. Many industries have their key measures such as:
RevPAR (Revenue per available room) for the hotel & accommodation sectors
Average spend per customer for a retail business
Units or quantities sold (number of widgets, litres of fuel etc)
No single measure can tell you how you’re tracking but put a few together (eg sales, costs, liquidity, interest cover) and you’ll get a good picture. The important thing is that they must each be relatively easy to calculate and recalculate periodically to see trends and effects of business decisions.
I have put together a simplified example which I hope doesn’t put people off as it’s full of numbers!
A 60-room motel in Sydney’s suburbs had a healthy 19% net profit in February last year – a great result in the GFC! However the market has become tougher since and to achieve the same occupancy the motel had to drop the room rate by $10 and market aggressively. The revenue fall was 5% - however with the higher marketing cost, plus inflation, operating profit was down by an alarming 25%. Moreover interest rates have risen over the period so the cost of the mortgage has also gone up, giving rise to a whopping fall in net profit of 57% (or 10 times the % drop in revenue!).
| Bates Motel | Feb-09 | Feb-10 | Change |
| Rooms | 60 | 60 | 0.0% |
| Room Rate | $180.00 | $170.00 | -5.6% |
| Occupancy | 55.0% | 55.0% | 0.0% |
| RevPar | $99.00 | $93.50 | -5.6% |
| Variable Cost (p/room) | $70.00 | $72.10 | 3.0% |
| Fixed Cost (for month) | $40,000 | $44,000 | 10.0% |
| GOP / EBITDA | $61,640 | $46,460 | -24.6% |
| GOP % | 37.1% | 29.6% | |
| Interest | $18,000 | $21,000 | 16.7% |
| Depreciation | $12,000 | $12,000 | 0.0% |
| Net Profit | $31,640 | $13,460 | -57.5% |
| NP % | 19.0% | 8.6% | |
| Interest Cover | 3.4 | 2.2 |
The purpose of this is to show that each of measures tells a story but we need to look at a few to see the full picture. This example only covers profitability but if we also looked at cashflow (which would introduce the mortgage principal payments as well as tax) the picture could very well be considerably worse. We’d also have to look at Balance Sheet measures to see if the motel is able to meet its debts and liabilities.
And these are only some of the financial indicators! Measures such as customer and staff satisfaction will have a huge bearing on future performance.
If you’d like to see the spreadsheet used in this example (and play around with the variables) or to talk about measurements in your business please get in touch with me.