The Importance of Watching the Numbers

We can only MANAGE that which we MEASURE.

In order to do this we must set some financial targets.

Then, we must follow this up by looking at our numbers at least monthly, if not weekly or even daily.

In one company I worked with I insisted on a Daily Gross Profit.

The managing director loved the idea but as you can imagine the production director wasn’t overly happy.

His team had to stock count every day.

But guess what?

Our stock-turn reduced, waste reduced, lead time reduced.

In all, money invested in stock reduced.  Cash cycle shorten – ie. More of our money in our bank.

Just one example of how strong financial control can improve bottom line performance.

This is why I have always held the view that accountants must move from overhead to profit contributor.

In fact, I always renamed the accounts department – Financial Control Department.

Then I moved the Department from Cost Centre to Profit Centre.

Bold or what???

But it works.

Now we must be looking at our numbers – all the time

I read a great article by Senator Feargal Quinn – an Irish business icon that I had the pleasure of working for when I was a teenager.

This is what he said,

“I was never passionate about the financial aspect of my business; however, I recognised it would be critical in determining our success or failure.

I see many businesses with the same lack of passion in the financial area but who have not recognised that the business needs to employ someone who will drive
this end of the business in a very strong way and would be strong enough to stand up to the business owner on certain business critical issues.

…Someone needs to be watching the numbers all the time.” Feargal Quinn

Now, truer words have never been spoken.

I have spent most of my working improving performance at businesses I worked with, fixing broken businesses, bringing some of them back from the brink and then being on the winning team that leads to success.

Stronger sales, with stronger margins, stronger financial position  – leading to growth, easier access to credit, leading to even stronger growth.

Watch the numbers.  They force us to make decisions.

We Must Measure That Which We Hope to Manage

Maintaining a clear view

An expression I use often

“you cannot manage what you do not measure”

immediately understandably – yet rarely implemented appropriately by SME businesses.

By its nature every business has one over-riding propose – it exists to make a profit.  It must, or it will die – this is serious then.

Profit is a measure of business performance.  Actual performance (achieved) is measured against our financial plans.  This comparison is the measure.  The common language is – numbers – understandable throughout the western world.

So what’s profit?

Profit is simply an equation.

Sales less costs = profit or (loss).

If sales are greater than costs then we make a profit.

If sales are less than costs then we make a loss.

Another very useful and often used measurement technique is to look at current years result and compare this to the same period in the previous year.

The real secret is to understand the differences that arise using the various comparisons.

For example, if our sales this year are €120,000 and this time last year were €100,000 the job is to understand the difference.

In other words, why are we €20,000 better off in sales this year when compared to last year.

Is it because we sold the same amount of product but increased the price by 20%?

Or

Is it because we held our price the same and sold 20% more product?

Or

Did we increase the selling prices by 50% but sell 20% less product?

Of course, the above examples applies to any element of the Profit & Loss account.

The key message here is to understand why certain results are achieved.

Only then can we take the appropriate corrective action.

Managing our Financial Health

Now that we understand performance measurement we need to focus on our position (Balance Sheet) management.  I am going to cover this is the third in my series next week.

You Cannot Win the War Fighting in the Trenches

Avoid Getting Lost in the Business

One of my favourite business expressions is
“you cannot win the war fighting in the trenches”

It explains so well the concept we are talking about.

We find that small business owners get lost in the business, and they forget to work on their business.

So how do we avoid this?

Firstly, understand our purpose. This is the why – “
“why are we setting up and why we will win in business?”
“why will people buy our services and / or products?”

It is from this that we develop our business model.

If starting up this is one of the most important things to do.
It is imperative that our purpose is understood with clarity and written down.
You will need to invest time into this exercise – it is one of the most important things you will do – so don’t skip it.
It is very important that we re-visit this document regularly as a constant reminder of our purpose.
– This will keep us focused
– It will lead to the development of our purpose
– It is use to develop our annual planning process

This is an exercise that we must ensure we re-visit regularly, so the good news is – it’s never too late to start.

This leads me nicely to second “Don’t forget to Work ON our business.”

This is the annual planning process, and another business expression, although a bit of a cliché.
“failing to plan, is planning to fail”

This is really the planning process to achieve our purpose.
Its objective is to explain how we plan to move our business towards its purpose in the coming twelve month period.
It sets out our sales volume targets, our sales price targets, and understands the costs associated with these sales.
This is an involved process – a team event. It is co-ordinated by the managing director and is ultimately his responsibility, however it cannot be his/her sole project.
The process needs a wider perspective than one person. Ideas need to be challenged, thoughts need to be developed.

The annual financial plan will provide direction, a plan to assess performance against, and a benchmark to set corrective action.

Aurora’s Accounting & Business Services’ clients engage in a rigorous annual financial planning process.
Our view is if big companies value this process and employ significant resources into it then so should we.
Our client’s agree.
And our clients have enjoyed the benefits of planning – setting our goals and measuring performance and ultimately achieving our business goals.