In an age where accounting software becomes more and more data rich, there is a risk that the data overwhelms the users and becomes meaningless in driving business performance. Many businesses who have robust financial systems and the reporting tools fall into the trap of having too much data and not enough information. Whilst there is no silver bullet, here are seven principles to improve how you monitor business performance that will help management achieve their goals.
Take a strategic approach
The management team should have the greatest awareness of the financial and operational goals. As such they should not accept the basic output of the finance system as a fait accompli. It is natural for finance teams to design systems that make it easy to record transactions. As business leaders you need a system that reports business performance and enables you to monitor progress against goals. Reporting should take a top down approach.
Identify business drivers
A business recently confided that despite initially heading for good financial results, the last few months of the year were disappointing. By the time the management team realised that results were slipping, it was too late to intervene. The management team now receive information on pipeline activity, tender conversions and utilisations across the business, in addition to the bare revenue and cost results. They have gone beyond looking at the financial results to monitoring what drives future results and can identify issues ahead of time.
Can you measure the drivers of your business rather than just the results?
Use key performance indicators
KPIs (key performance indicators) are an effective and brief way to report business performance. The KPIs should reflect performance, be capable of being measured, compared and acted upon. By definition there can only be a small number of key performance indicators. Try to limit the number of KPIs available to the team to between five and nine balanced measures. Just as the overall goals cascade through the organisation and often become more granular, so can the KPIs. Operational management and staff will need to monitor performance in a greater level of detail than the directors.
Make the right comparisons
There can be a tendency to compare performance to last year. Being up on last year can provide a sense of comfort. Firms anticipating change are better served by comparing actual results to targets. For businesses in a growth phase, last year’s results will usually be exceeded. It is more pertinent to know if your business is on plan, rather than simply being in line with last year.
Don’t sweat the small stuff
It is important to recognise the competing pressures of timing and accuracy. Generally, the accuracy of information increases as time passes. For example, management accounts could be produced very soon after a period end and before accurate adjustment for accruals and prepayments, for instance. At the operational level it may be worth sacrificing some accuracy for the sake of speed.
Take a balanced approach
Whether at board or operational level it is important not to focus overly on one aspect of performance. For example, a business that only values the revenue it generates compared to, say, investment in people, may not thrive in the long term. Clearly sales and profitability matter but don’t ignore customer satisfaction, staff turnover, pipeline growth or other non-financial measures which may be key to your future success.
Use consistent presentation
Irrespective of the level of financial expertise at a management team level, using a consistent format for your reporting should improve its effectiveness. Providing a brief commentary in addition to the numbers, graphs etc is also useful. This can drill down into more detailed operational matters to provide appropriate explanations.
Following these principles should improve your reporting and give you information on the drivers of future business performance. Act on this information and it will help you achieve your goals.
To find out how we can assist you and your business, contact Jamie Lane.