Q: I understand the need to monitor my business to ensure we’re hitting our goals and that our processes are operating correctly. What are the most important reporting tools that any business should monitor and with what frequency?
A: Every business needs a robust financial reporting system including an income statement, a balance sheet and a cash flow statement. For the purposes of management decision making, it’s generally best to use an accrual accounting system because it does a better job of matching expenses to revenue. If you want to use cash accounting for taxes, you can still do that and use accrual accounting for management decision making.
Separate costs directly associated with delivering your product or service from selling, administrative and overhead costs. In a service business, understanding the profitability of each job is critical. Similarly, in a product-based business, it’s important to understand product line profitability. Revenues and/or costs that are the responsibility of a single manager should be broken out separately. This makes it easier to hold people accountable. Insist on receiving financial statements within two weeks of the end of each month.
While financial statements are necessary, they are not sufficient. Often, by the time problems show up in the financial statements, the damage is done. What’s needed is a set of daily, weekly and monthly metrics.
Unfortunately, there is no “one size fits all” solution — no simple formula that will pop out the needed metrics. Each business is unique and will require metrics tailored to the specific situation. However, following the set of guidelines below can be extremely helpful in constructing a robust set of metrics for your business. Metrics should:
Be layered in a pyramid – The principal should focus on a small number of measures that will provide a view of the entire business. If an issue is identified at the top level, managers can drill down into lower levels of the pyramid that contain more detail to determine how to address the problem.
Be “MECE” – (Mutually Exclusive and Collectively Exhaustive). Mutually Exclusive means that measures at a given level of the pyramid should not overlap. Collectively Exhaustive means that, taken together, the metrics at any level cover all of the important elements of organizational success.
Be measurable and stable – Metrics that are objective and quantitative are more valuable than subjective, qualitative assessments.
Be viewed in context – If sales in the Northeast region were $78,000 in May is that good or bad? One can’t possibly know without context. An isolated number is meaningless. Context is most often provided by a comparison to history, to a budget or to competition.
Contain checks and balances – For example, reducing inventory at the expense of on-time deliveries is unacceptable. Real progress requires that improvements be made in both of these two metrics simultaneously. They balance each other.
Have point accountability – One person and only one person should own each metric. If more than one person is responsible, no one is accountable. For a business to continue growing, the principal must delegate responsibility and authority. To do this effectively, an appropriate set of metrics must be in place. This can be tricky business, but following the guidelines outlined above will help business owners avoid unpleasant surprises.