In an age where accounting software becomes more and more data rich and with the rise of generative AI the access to data is only likely to increase. There is a risk that the volume of data overwhelms the users and becomes meaningless in driving business performance.
For many businesses who have robust financial systems and controls, the reporting tools can fall into the trap of having too much data and not enough information. Whilst there is no silver bullet, we outline seven principles to improve how you monitor business performance, that will help senior management achieve their goals.
7 principles to monitor your performance and business goals:
- Take a strategic approach
- Identify business drivers
- Use key performance indicators
- Make the right comparisons
- Don’t sweat the small stuff
- Take a balanced approach
- Use consistent presentation
Take a strategic approach
The management team should have the strongest awareness of the financial and operational goals of the business. 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, in line with their needs. However, as business leaders you need a system that reports meaningful business performance and enables you to monitor progress against goals. Reporting should take a top-down approach.
Identify business drivers
During a recent conversation with a finance director, they recently mentioned that despite initially heading for good financial results, the last few months of the year were disappointing, impacting the overall financial performance. By the time that the management team realised that results were below budget and were slipping, it was too late to intervene to change these results.
As a result of this historic issues, the management team now receive information on a number of new metrics which are the drivers of the business e.g. pipeline activity, tender conversions and utilisations across the business, in addition to the usual revenue and cost results. They have gone beyond looking at the historic financial results, towards monitoring what drives future results and can identify issues ahead of time. This allows management to be pro-active in impacting negative trends prior to them being realised in the financial results of the business.
The key question is how can you measure and identify the drivers of your business?
Use key performance indicators
KPIs (key performance indicators) are an effective and concise way to report business performance. The KPIs should reflect performance, be capable of being measured, comparable over time and acted upon.
By definition, there can only be a small number of key performance indicators for each business. It is important for business owners and managers 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 which should be reflected in the number of KPIs presented to them, focussing on the ones which are relevant for the different roles.
Make the right comparisons
As a starting point, within financial reporting, there can be a tendency to compare performance to last year. Being up on last year can provide a sense of comfort to stakeholders. Depending on where your business is on its cycle, firms anticipating change are better served by comparing actual results to targets and budgets. 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. This means that the target and budget setting process, needs to be completed ahead of time and with the appropriate level of detail and attention by senior management.
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 adjustments for accruals and prepayments, for instance. It is important management is aware of this trade off and 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, ignoring other factors. For example, a business that only values the revenue it generates compared to, say, investment in people, may not thrive in the long or medium term. Clearly the growth of sales and profitability matter, but don’t ignore KPI’s such as customer satisfaction, staff turnover, pipeline growth or other non-financial measures which may be key to your future success. It may also be an important consideration in remuneration of senior management, aligning growth in remuneration with improvements in all KPI’s, both financial and non-financial, to ensure their interests align with the long-term success of the business.
Use consistent presentation
Irrespective of the level of financial expertise at your management team level, using a consistent format for your reporting should improve its effectiveness over time. 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. This approach also recognises how different types of people respond and understand information and data.
Following these key principles will improve the quality and effectiveness of your reporting and give you important information on the drivers of future business performance. Act on this information and it will help you achieve your goals going forward. Please get in touch to understand how we can assist you in improving the quality of your management reporting to drive your business forward, contact Jamie Lane or Tom Alun-Jones.
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