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The Impact of Effective Sponsorship and Events on Brand Growth
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July 12, 2024
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It is a well-known fact that most successful business owners, founders, and even CEOs suffer consistently from worry, anxiety, and sleepless nights.
Considering the myriad of issues they have to contend with daily, this fact comes as absolutely no surprise. In fact, a Canadian mental health study found that 62% of business owners felt depressed at least once a week, 54% said that stress impacted their level of concentration at work, and 67% were stressed about their business’s cash flow.
Business owners of large, midsize, and small organisations must continually and consistently take stock; they have no choice but to keep abreast of their organisations’ key financial indicators and the non-financial ones as well.
A few key indicators can be categorised as ‘top of the critical list’ of non-financial factors that should be taken into deep consideration when evaluating the performance of your business.
These factors should most definitely be applied to your business analysis function in conjunction with the financial factors. Some of them are:
These are arguably top-of-mind considerations for business owners. Determining the organisation’s pricing strategy,
exploiting growth opportunities effectively and efficiently, keeping ahead of the competition, and gaining strategic insights and understanding into the customer's or client’s needs should be paramount for any business owner.
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In addition, the marketing strategy has to be completely customised to your business’s type and size; marketing can never be a one-size-fits-all initiative.
This simply refers to the regulatory and economic territory within which the organisation operates.
Is it regulated by the telecoms, financial services, oil and gas, pharmaceutical, construction, or even Hospitality regulators? How stable is the economy within which it operates?
What is the level of economic growth? What are the macro-economic indicators, such as inflation and unemployment, and how do these indicators affect the business as a whole?
This is also an extremely critical non-financial area of consideration; a business owner needs to recognise that the war for acquiring and retaining the right talent is taking its toll on businesses.
The ability to hire right can be game-changing for any organisation. Any organisation that can acquire the right talent and effectively manage them for performance in a COVID and post-COVID environment has the best recipe for success.
To what extent has the organisation integrated technology into its solutions and offerings? Do these technologies represent a competitive advantage? How sustainable are the elements of the investment in technology?
A high number of businesses have failed due to their inability to embrace or integrate technology-driven solutions into their existing business models.
In the words of a recognised industry expert on integrated technology marketing, Michael Gale, “virtually every Forbes Global 2000 company is on some sort of digital transformation journey.”.
Although most companies and executives know how crucial it is to evolve with technology and create digital processes and solutions, putting it into action is a different story; a staggering 70% of digital transformations fail.
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Alongside the non-financial indicators, it is vital that business owners track and monitor key financial indicators to analyse their businesses’ performance.
Financial metrics necessary for tracking performance are by no means generic—not to businesses of similar size, not to businesses within the same country, not to businesses within the same sector or industries, and alarmingly, not even to departments within the same business.
The finance function within businesses needs to craft the right strategy for the customised design and implementation of the right financial metrics. Far too often, finance is relegated to the back office. It is perceived to be a non-revenue-generating, number-crunching, and tunnel vision function.
According to research undertaken by webexpenses which interviewed more than 500 finance professionals across the UK, 60% of finance professionals feel undervalued within their organisation, with more than half (53%) feeling they do not get the same respect as colleagues working in other department
The truth is that the finance function is one of the most strategic functions of an organisation. The secret to unlocking or extracting the strategic value of any finance function is to give them a seat at the table; only then will the finance function be able to create and maximise stakeholders’ returns.
After years of experience in metric design and implementation across businesses with different compositions and in various sectors, I advise that the following indicators should be used in addition to more customised metrics:
Most organisations do not track this basic financial indicator. One of Harvard Business School's articles on 13 financial measures to monitor highlighted net profit margin as a key financial metric for any organisation.
This profitability indicator measures the actual percentage of net profit an organisation earns in direct relation to its total revenue and is calculated by dividing net profit by the revenue in any one period.
The higher the percentage of this net profit margin, the better the organisation is deemed to have performed. High net profit margins typically indicate a good pricing strategy and/or the presence of strong operating cost optimisation initiatives within the organisation.
When applying this indicator, bear in mind two distinct gaps: a heavily geared and a capital-intensive (PPE-heavy) organisation; these could distort the net profit margin by presenting a lower net profit margin.
This key indicator focuses on the direct cost or cost of goods sold and how much of this cost line is used to generate the organisation’s revenue.
This metric is a fundamental indicator for manufacturing companies.
as they tend to have higher direct costs than organisations whose solutions are more service-oriented.
Again, this is a profitability indicator, and it is calculated by dividing the gross profit by the organisation’s revenue.
Just like the net profit margin, it should be compared with ratios from previous periods for the same organisation and with other organisations within the same sector. A high gross profit margin indicates an efficient use of resources in the production of an organisation’s products.
This cash flow measure is essential for keeping close tabs on cash generation compared to revenue generation. It provides a very clear insight into how well the business collects its cash.
Businesses in the hospitality or aviation space might not have their cash tied down as much as organisations in the consulting or telecom infrastructure sector.
This financial ratio is calculated by dividing the organisations operating cash flow by its net revenue. The ratio we are looking for here is at least one for a healthy organisation.
A ratio below this could mean that there is an ineffective cash collection system within the organisation. This ratio addresses receivables in the same manner as an activity ratio that measures accounts receivable days.
This liquidity ratio measures an organisation’s ability to pay off its liabilities in the shortest possible time frame.
It examines the current assets of an organisation and allows the user to almost conduct a scenario analysis that considers what would happen to the organisation should it need to pay off its short term liabilities “quickly”
It is calculated by deducting inventory and prepaid expenses from current assets and dividing the resulting figure by current liabilities.
The ideal quick ratio should be one or above. This important financial ratio is similar, yet different, to the ‘current ratio’ as it deducts the inventory and prepayments figures from current assets.
These are typically more difficult to convert into cash. In a US study of why businesses fail, it was found that 82% of failed businesses experienced cash flow issues.
My belief is that a sizable proportion of these companies were simply unable to convert some assets to cash promptly.
This ratio is a solvency and financial leverage indicator. It examines the capital structure of the organisation and seeks to highlight any over-reliance on debt or equity. This financial ratio is calculated by dividing total long-term debt by shareholders equity and it shows debt as a ratio of total equity.
Generally, a ratio of one or higher is considered less risky. It is crucial when applying this ratio to make comparisons only with organisations within the same sector; this is important because certain sectors have a higher appetite for debt than others.
Capital-intensive organisations generally have higher debt-to-equity ratios than service-oriented organisations.
A caveat is that debt is not always bad for business; although it typically comes with increased expenses, it can be used to fund feasible and well-thought-through growth strategies without affecting the structure of shareholder equity.
This valuation indicator is a strong measure of the alignment between an organisation’s share price and earnings per share.
This financial indicator for me is one of the most significant considerations for investors as it clearly communicates the level of RoI an investment carries.
This was also corroborated in an article by Trade Brains on the most important financial ratios for investors. The ratio is calculated by dividing price per share by earnings per share ((net income – preference dividends)/weighted average of ordinary shares outstanding.
The P/E ratio should always be compared to sector averages. Generally, P/E ratios higher than sector average are often perceived as overvalued, risky, and volatile, while shares with lower than average
P/Es are often perceived as future moneymakers and afford investors the opportunity to benefit from share price increases.
This is a profitability/investment ratio. Like the P/E ratio, it is often used as a decision-making metric for investment purposes.
It is calculated by dividing earnings before interest and tax by capital employed (this represents the total amount invested in the organisation).
The question that this key metric answers for investors is how efficiently is capital used to generate profit? This financial metric should be compared to historical figures of the same organisation in order to establish a pattern for capital utilisation.
Both the P/E ratio and the ROCE should not be used in isolation by business owners in order to attract investors; they should be tracked alongside other investment ratios to arrive at more accurate and holistic conclusions.
Do bear in mind that all the metrics mentioned above should be interpreted together; by that, I mean a single promising metric should not be used as a sole positive financial indicator for your business.
Devising the right set of key financial indicators that cover all the critical areas of business sustainability is critical for business owners.
Not only does it set the right accountability tone for the individuals tasked with the responsibility of revenue generation, but it also provides a clear rhythm and target-setting basis for monitoring and performance evaluation.
In addition to the non-financial metrics stated earlier, these financial metrics should be incorporated into periodic management review meetings in order to drive a culture of transparency and objectivity as they serve as a robust set of indicators to be monitored.
Finally, and perhaps the most important point, business owners might actually sleep a little better at night knowing there is a system in place that would identify any potential sustainability or going-concern issues well before they are likely to materialise.
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