Step 1 – Make the commitment
You need to commit to developing a non-accountants understanding of the finances. Some common (and potentially dangerous) alternatives are ‘I leave it to my accountant’, or ‘I always monitor the daily sales’ or ‘I have a pretty good gut feel for how the business is going’. This commitment is not just an attitudinal change, it also requires you to commit some uninterrupted time each month to go over your financial reports. Go ahead and block out two hours each month in your calendar for the next six months to review the management reports.
Step 2 – Review the right things
Make sure the management reports you are reviewing are relevant and meaningful. This does not necessarily mean that they are complex or detailed but rather that they focus on your critical success indicators and provide you with a management overview of how your business is tracking. If you do not have any management reports now then review your systems to develop some, and I would suggest these should be produced monthly. Here is a management reporting framework that I suggest you consider with the key being to keep it focused on the key indicators.
This does not mean complex or detailed. I would think two pages should suffice. Look for two to three indicators or measures to show how you business is going in these areas.
a. Profitability – I suggest looking at gross margin performance, earnings before interest and tax performance, or return on capital employed. All of these were fleshed out in previous editions.
b. Stock – stockturn, gross margin return on investment (GMROI) for total business, and by department.
c. Staff – sales per full-time equivalent staff, wages and superannuation costs as percentage of sales.
d. Space – sales per m2, in total and by department.
e. Sales – average transaction size, stock productivity (sales by stock by department).
f. Cash – bank, creditors and debtors balances
If you put the above into an easy to read and understand format you will be in a great position to review your business each month. I would suggest a simplified balanced scorecard for those who would like to go a little deeper and wider. By this I mean developing some appropriate measures on your customers, your staff, your systems, your finances (per above) and your overall business strategy (refer next months article). If you look at the above and say I have no idea what he is talking about or I will need to see my accountant to produce these, then I suggest that is an early warning sign that you need to make some significant changes. And I would suggest this report should be produced and reviewed within seven days of the end of each month.
Step 3 – Develop and implement an action list
As you do your management review have a pen and paper so that you can develop an action and checklist to ensure it is implemented and followed up. To be specific I would suggest you list on a page each of the major areas and during your review rank them (1 to 10 as to whether good/bad etc), write down the actions required, the person responsible, date for completion and prioritise (A to E according to importance, urgency etc).
Without this action list (and follow up action) there is the danger that this becomes another meeting or chore.
If you find that nothing meaningful is coming from this review, then I suggest you look at your management report and ask whether you are highlighting the correct measures and indicators.
Two key tools
As you take financial control of your business there are two important tools you should develop and use.
1. Budgets and targets. How you develop these is up to you but I would suggest a profit budget and purchases budget are the main ones. Do them on a departmental as well as total basis and you will be in a great position to control your business. Consider setting targets for each of the key indicators in your management report (see step 2 above).
2. Cash and profit. You need to develop your own way of ‘marrying’ your bank balance with your profit performance. If cash is tight (or plentiful) then you should know why. It may be poor credit or pricing policies, or excess stock, or low gross profit, or high drawings, or bookkeeping fraud etc. Whatever the reason you need to have an owners (as distinct from an accountants) understanding of why.
Taking financial control of your business does not mean you have to be a financial expert, but it does mean you have to develop an owners or management understanding of the critical success drivers of your business, and to be able to review them regularly. Consider the above steps to assist you in this regard.
Brett Stevenson is the director of Excellere, a company that specialises in workshops covering financial and strategic management. www.excellere.com.au