To understand whether the performance metrics are reasonable, target percentages are provided to each expense category and many line items. In a profit and loss (P&L) example below, we require (for a budget) a total cost of sales to be under 60% as a percentage of sales (see month and year to date budget % to sales column 4 and 9). Gross profit, is expected to be 42% expressed as a percentage of sales, and net profit expectations for the full budget year are just over 30% (see column 4 and 9), that is, every dollar spent with the return of over 30 cents.
These target metrics form part of your overall performance metrics for the business and should be monitored overtime to check for any adverse movement away from the required numbers or percentages to meet your goals.
Some performance metrics in an analysis, however, may be given as unit, dollars, or derived from other information so that a dollar-based target can be established. To ensure that the reader of the report knows that the target may be in a unit other than a percent, the term target metric or performance metric is used.
Therefore, the inclusion of a target metric for each expense line item allows the worksheet to be used as an expense driven analysis. This is useful when a prediction about the business expansion sales target is needed. For example, if expenses are estimated to be $32,000, and they are to be 45% of sales, the sales target would be $71,111 ($32,000/0.45 = $71,111). This means before starting a new business model this could provide some useful quantitative information for budgetary purposes.
The expenses each month must be entered into the profit and loss statement in much the same way as any cost. After the indirect expenses are calculated and totalled they are subtracted from the gross profit, to present the net profit. See also business tools
Sales Performance Metrics
The analysis of the data that compares the percentage is that data relative to the target metric required. The final calculations can then be made comparing percentages actual to budget, this can then tell the business, whether the sales costs or expense is operating in an optimum range of not. The greatest concern to the business is that the output (gross profit, expenses, and net income) are all within the target metric range.
Although there are many ways to look at the data, the objective is to examine the category targets and their components. When they are outside, the optimum range, then the manager should ask why. In some cases, a line item expense within the category is too high or sales too low. In other words, it tells the business, what is out of range to them to focus on a specific system issue. Likewise, once the worksheet analysis shows a problem area or areas, the business, just like a vehicle mechanic, must investigate to see what is wrong and determine how it can be corrected. See also sales performance
Net Income and Cash Flow
Earning an adequate net income is the main objective of any business; however, whether the net income earned will be enough is a matter for the business owners to decide over time. In general, the net income earned, should be over 10%, and over 15% of sales usually is describing a very good operation, providing this return can be maintained and improved upon over time. Naturally, if there is not enough income to cover expenses, then there will be not be a profit generated. In some cases, it will also be a profit, but not enough cash to pay the bills. This is typically due to several reasons. One is the service facility may be owed money from various sources and delayed payments causes bills to come due before cash is received to pay them typically, these are referred to as cash flow problems.
There also may be cash flow problems when the net income cannot pay the loans the owner borrowed to start the business. Because loans to start and expand the business are typically paid from the net income, the failure of the net income to cover the principal and interest may cause a cash flow problem.
Useful Performance Metrics to Consider
Here is a collection of metrics that you could use to monitor your business performance over time.
Spend some time sitting down and come up with some performance metrics or critical success areas (pulse checks) for your business. I am sure the list above will now get you thinking about how to measure the growth of your business operation!
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