By Michael O'Donnell
13 Sept 2020
Next time you’re doing a sailing course, or simply taking a walk by the harbour and boat yards, take a look at the tell-tales on the sails. They look like small red and green shoe laces at points on the sails that dangle and flap in the wind. They look fragile and pointless. In fact they’ve an important function that helps the crew trim their sails correctly, to maximise the efficiency of the sails – reducing the turbulence that causes the sails to stall, which slows the boat down to a crawl.
Once the intended direction of the boat has been decided upon, (either on a navigational bearing or during a race) and determined which direction the prevailing wind is coming from, then the sails are trimmed in or out as needed so that these tell-tales appear to hover horizontally rather than tumble in the breeze.
Why trim your sails properly? Because you get to go faster.
Good KPI’s for your business enable you to ensure that your business is working efficiently for the prevailing conditions. At time of writing, the economy is moving into a Recession period. Ensuring your business is trimmed at optimum for the prevailing conditions is going to be more important than ever.
The Covid19 lock-down caused many businesses and operations to mothball. However, many overheads such as leases, salaries, rent and IT costs have remained payable. As the unlocking of the economy continues and the order books and calendars fill up again, we needs to guard against overtrading.
Overtrading is a term used in analysing a business’ finances. It often occurs when companies expand their operations quickly and/or too aggressively. Companies that are overtrading enter into a cash spiral where working capital and cash levels reduce even though sales (especially credit sales) are increasing. This can lead to increased borrowings, which in turn increases interest expenses and then ever decreasing circles. Overtrading companies eventually face cash and liquidity problems.
Example: A manpower supply company seeks to boost revenues by selling skills of its engineers and fitters into a particular market. To do this it brings in too many new individuals, who have to be housed, paid, visas and medicals paid, etc. When the new contracts don’t materialise quickly enough the business quickly runs out of cash.
This wouldn’t happen to you right?
As the CEO or owner, you need to assure yourself and others that you’re watching for:
Overpaced growth in business development and sales.
Reduced net profit as a result of overheads being paid, but not supported enough by gross margin (itself generated from sales and associated direct costs).
The business running with poor market information and unclear internal financial reports.
Cash flow problems and shortage of working capital.
Inaccurate or unrealistic cash budgeting and forecasting.
Having many unpaid suppliers.
Elevated and increasing levels of interest and debt servicing.
High gearing ratios.
Strong market competition.
Slow moving stock, overstock and unbilled work-in-progress.
Falling current and quick ratios and inability to meet commitments when due.
Conclusion:
Keep your finances and cash in control. Know whether or not you’re overtrading. Have good KPI’s which tell you quickly how efficiently your business is moving and in the direction you want to go rather than the temporary prevailing conditions. Know the tell-tales for your business. And mind the rocks.
Michael
Images: www.wallpaperup.com; www.syoa.co.uk
