How do SMEs steer their business? Results of our study

By Dr. Karolina Sauer-Sidor, Andreas Sauer, Joerg Erlemeier. For any inquiries, please reach out to Dr. Karolina Sauer-Sidor.

Over the last years with SMEs facing several challenges such as cost pressure, high competition, changes in customer needs, and technological advancements, the pressure on profitability has remained high. Over the last three years 43% of SMEs maintained their profitability flat, 14% experienced a decrease and 40% managed to increase their profitability. As for revenues 45% of SMEs have reported that their revenues remained flat, and 15% have experienced a decrease in revenues, highlighting a need to focus on growth and performance.

While SMEs are pursuing several priorities for the next 12 months and 2-5 years (more in our article here), how do they steer their business to drive performance?

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Revenues, cash flow and profitability are the three most important financial KPIs that SMEs are using for financial steering. Cash flow is used for steering by 60% of SMEs in the UK making it highest across all categories and countries. In addition to securing liquidity for normal business operations, the focus lies as well on aspects such as investment and financial planning and risk management.  

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With regards to operational tracking, depending on KPIs, only approximately 40%+ track KPIs at least monthly. The most regular tracked operational KPIs are production, supply chain and digital KPIs which are tracked by 45-46% at least monthly, but also customer experience, technology, employee and commercial KPIs are tracked by more than 40% at least monthly.

The operational tracking increases significantly on a quarterly basis – at least 70% track supply chain, commercial, digital parameters and customer experience KPIs respectively. It is not surprising that the supply chain is the focus of monitoring for many SMEs. In a business environment characterized by volatility and uncertainty, it is essential to secure and steer closely your own supply chain.

The overall status of the operational steering underlines the need to improve operational tracking, both in terms of the scope as well as the frequency.

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According to our survey SMEs have multiple business priorities – top three are growth, innovation and customer experience. However, only 48% of respondents are well on track implementing their plans for the next 12 months. 28% have a plan but are behind in execution, 20% are still building their plan, and 4% do not have a plan.

As it relates to mid to long-term priorities over the next two to five years, the gap to successful execution is even larger. Only 44% have a plan and are on track with execution. 28% are late with execution, 22% are building a plan, and 6% do not have one yet.

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This highlights the need and opens at the same time a significant opportunity for many companies to introduce a strong and comprehensive implementation tracking for the key priorities to ensure a timely and on track delivery of initiatives and activities. The study shows that building new capabilities, sustainability initiatives and succession plan are the initiatives where the highest share of SMEs are not on track.

Even for the companies reporting to be on track – the key questions are do you have the right initiatives… are they generating impact and are these initiatives making your company stronger and more resilient

If the companies are behind in execution, how to accelerate and get back on track? What are the capabilities to enable it?

For the ones building a plan or not having a plan – is the challenge to build a plan or finalize or prioritize? Or are there capabilities missing?

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What can you learn from these insights?

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In order to deliver on the business and financial priorities, three key elements of performance management need to be enforced:

Financial steering: Based on our market study, the following financial KPIs were named most frequently: Revenues, cost, profitability, cash flow but also equity ratio / return on equity.

What could be a well-structured framework which ensures an impactful steering of your financials? What are the do´s and don´t you should have in mind? A couple of reflections to be taken into consideration:

1. Define and establish clear financial objectives and integrate them into your budget and mid-term plans and allocate them to people in your organization (executives, functional leaders or subject matter experts), who are able to make decisions and prioritize initiatives
2. Make the goals measurable, identifiable and link them to your financial statements (e.g. accounts within your profit or loss statement, balance sheet or working capital)
3. Establish regular meetings to monitor your key financial KPIs and initiate initiatives in the event of deviation (“back-to-plan mindset” should be part of your governance)
4. You should stay focused on the performance and monitor your core KPIs even if you have achieved your goals and implement a process of continuous improvement – where can we drive further performance improvement?
5. Conduct scenario-planning and what-if analyses as part of your financial steering framework to evaluate how internal or external situations could impact your financials

…and avoid the following don´ts:

• Too complex financial steering
• Non-core-business related financial KPI´s
• Unclear responsibilities in steering and execution

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Operational steering: A set of KPIs across key areas of the business: brand, customer experience, technology, employee, sustainability, risk, commercial, supply chain, production, digital / online need to be established.

Example of KPIs across categories:

• Brand KPIs e.g. brand awareness
• Commercial / marketing and sales KPIs e.g. number of customers, revenue / customer, order intake
• Customer experience KPIs e.g. Customer satisfaction / Net promotor score

• Digital/ online presence KPIs e.g. traffic, click through rates
• Employee KPIs e.g. employee satisfaction, retention / attrition, diversity
• Environmental/ sustainability KPIs e.g. emissions
• Production KPIs e.g. Production efficiency and throughout
• Risk KPIs e.g. top risks and their value at risk
• Supply chain KPIs e.g. order fulfillment rate

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Implementation steering: Tracking of the priorities and initiatives – status, responsibilities, impact.

Besides the steering of your financial and operational KPIs, successful SME´s have also shown, that the successful implementation of plans and initiatives are mission critical. These are some reflections regarding implementation:

1. Define for each (or specific) areas KPIs which are measuring the current status (metrics should be simple, accurate and meaningful)
2. Set up a cadence for regular reviews (monthly, quarterly) to monitor the progress against the goals and a forum for setting clear operational priorities, monitoring progress, and holding the organization accountable for their contributions towards priorities and initiatives.
3. Define the scope, responsibilities and the decision-making process to ensure clarity.
4. Ensure and align all priorities and initiatives with the overall business strategy
5. Identify variances to understand the underlying causes of deviations and implement corrective actions. Forster a back-to-plan mindset in your organization
6. Foster a culture of continuous improvement and feedback, implement transparent and open communication channels and facilitate the sharing of insights to refine the process
7. Invest in training and development of your people and use of supporting tools and technologies

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These initiatives will help increase the efficiency and effectiveness of your organization.

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