Developing your Skills, Financial Insights | May 24, 2013
Now that you have decided what to measure, you have to determine how to use the reports to monitor your company, or team’s, performance compared to plan. Some of the common failures are:
1. Producing reports that are no longer relevant;
2. Not looking at relevant reports;
3. Not sharing pertinent information from relevant reports with the people whose activities are measured by the reports and/or not facilitating their ability to read and use the reports.
The following are key report monitoring activities that we undertook:
1. Produced balance sheet, income statement and cash flow statements, and compared them to our plan once per month, as soon after month-end as possible. We then explained material positive and negative variances in the key components of these statements (e.g. sales, variable expenses, cash flow items etc.) and determined any actions required by these variances;
2. Produced a daily cash position. For those organizations that do not carry a cash balance (i.e. they use their operating line), monitor the actual use of the line versus the maximum amount that is available under their line margin terms with the bank. This will provide the amount available each day;
3. Tracked the following on at least a semi-monthly basis:
a. Sales dollars;
b. Gross margin dollars;
c. Key variable costs (e.g. labour).
These numbers should be extrapolated over the entire month thereby giving you an estimate as to what your income statement for the month will be long before your financial statements are produced. This will allow you to take actions sooner where needed, as you do not need to wait for the financial statements after the month-end. Constant refinement of this process will result in your pro formas for the month being closer and closer to the actual results;
4. Produced a sales activity pipeline that allowed us to reasonably predict sales 30 to 60 days ahead of the sales taking place. In our case we tracked:
a. Proposals made (number, sales dollars and gross margin dollars);
b. Credit applications received (number, sales dollars and gross margin dollars);
c. Commitments received (number, sales dollars and gross margin dollars);
d. Actual sales and gross margin dollars achieved.
These were tracked as follows:
a. Current outstanding inventory of each at the end of each month;
b. The activity in each that had taken place within the month.
As a result, we could reasonably predict sales and gross margin dollar numbers well ahead of the actual sales and gross margin, and were able to take actions much earlier.
Where possible these reports were produced for each division, region, team, sales person etc. as appropriate, and shared with the appropriate managers.
One of the most important factors in the success of reporting and monitoring is the example set by the CEO and CFO. The two key behaviours needed from these people are:
1. They must be active users of the key reports themselves and thereby set a culture of proper use of information;
2. The CFO must strive to facilitate the use of the reports by the appropriate managers. It is not enough to simply produce the information. A great CFO takes pride in making the use of the reports as user-friendly as possible, and that the people who the reports are for are, in fact, using them to the fullest extent.
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By Terry Thompson, Surrey, BC, CYBF Mentor, email@example.com