Achieving clarity of your internal financial statements is a great start in improving your ability to transform the numbers into strategic purpose. The next part of the process is to establish certain measurement factors to assist in managing the business.
Establishment of measurement factors should incorporate the actual operations of the business. Your financial statements are a reflection of your entire business operations. The measurement factors should be in line with the critical operating factors that are related to the overall profitability of the Company. The factors must be looked at on a real time basis and not necessarily a historical basis. An example of this might be the creation of a daily order input analysis. Order input is a predictor of future business activity. A decline in order input can be an indication that future sales trend is weakening and so a meeting with the sales manager is in order. This is a very simple example of how real time financial measurement can help an owner anticipate future challenges.
Financial measures should be simple and easy to track. In developing the key indicators with your Herbein advisors, you should limit the items you track to relevant measures that will assist in decision making. Measures always need to be updated to make sure they continue to be relevant. If you are not using the measures, then get rid of them and try other measures. The key here is not to generate meaningless data, but generate key real time data that will help in making operational decisions.
I will devote a separate article regarding the budgeting process and why this is such a critical measurement device of every business no matter what size. Many times, I will hear from an owner stating the business is too unique to establish financial benchmarks. This might be true when benchmarking industry standards, but every business can link financial measures with operations no matter how unique. Creating unique models for financial measurement of your business with your Herbein advisors should be top priority in order to gain clarity of numbers.
For any questions regarding this article please contact Thomas J. Price at [email protected].