Business Performance & Financial Management Series #1
“Don’t Fear the Numbers”
As a business owner, you are intimate with your company and its operations. And typically your strength and greatest comfort is when you are selling your product or deeply involved in the production and performance of what you produce. For many, these strengths are offset by weaknesses in financial management and an understanding of the benefits that good financial reporting can achieve. Often businesses which hold monthly, weekly and even daily sales & production meetings will only review financials on a quarterly or maybe monthly basis. So why does this occur?
For two reasons. Most importantly, that the information which is being presented is not relevant. And secondly, that management does not have a process to review and utilize the information presented.
The key is to provide timely and accurate information in a concise format that management can review and use appropriately in the daily operations of their business. When the information is clear and concise, management will not get bogged down. When the information is useful, management will see the benefit. Here are a few ways to provide concise and useful information:
Identify what is important.
There are 2 points for this. The first, is to ask yourself what information you can use today that will help you make better and more effective decisions immediately. The second, involves providing information that you can use today that will help you make better decisions in the future. Some examples:
- Important today: Cash available and anticipated receipts & disbursements over the next period; Margin on recently completed projects; A/R over 60 days; Pricing adjustments for production and other cost centers; Actual costs on orders shipped vs. budgeted; Anticipated production for the next period vs. commitments; etc.
- Important tomorrow: Back order production and sales reports; Anticipated working capital requirements; Monthly or Quarterly comparative analysis between current & prior periods and vs. budget for the period; A/R and Inventory turnover analysis; Staffing levels and wage analysis; etc.
Ensure the information is relevant and accurate.
The report should be based on the most up to date information. If information is outdated then the ability to assess the impact of changes made based on this data is not relevant. The accuracy of information is important in order to ensure that the operational decisions made are meaningful. If for example you estimate work in progress, estimate production wages and then estimate your repairs and maintenance costs, all you will have achieved is an estimate. Should your operational decisions be based on estimates?
Use the information.
What is important today should be useful to implement in the next moment. If costs are running higher than anticipated, then pricing may need to be adjusted immediately. What is important for tomorrow should allow for further analysis to determine potential operational trends requiring your attention. Together, this information is a critical tool to assist in determining the best course of action on how to achieve your business objectives.
If you have made changes then you should have an expectation of what effect these changes will have, and when they should happen. Assumptions are always made when using information, often time the assumptions are only partly correct and further adjustments are required as more information arrives. Expected changes should form part of the upcoming financial review to ensure that they are analysed and further adjusted if necessary.
The financial review process should not be a painful exercise. Only pertinent information needs to be presented during regular reviews. When too many “extras” are added the information becomes overwhelming and that which is important is ignored or not acted upon.
So, ask yourself, if you only had 60 minutes each month to review your financial performance, what would you really want to know about your business to help make better decisions and ensure that you meet or better yet, exceed your business objectives?
Jim Melville, CPA, CA