Measuring the outcome or end result is not enough. There’s no use looking at your sales figures and profit and loss statement at the end of the year, wishing you could have made more money.
These results are lag indicators that show you the effect of what happened during the year. They are already history.
If you want to be able to make more money and improve what’s happening during the year, you also need to monitor lead indicators or the activities that cause you to achieve the results.
Monitoring your lead indicators enables you to see what’s happening closer to real time, allowing you to see patterns, trends and make predictions about the results you’re going to get.
You can use those predictions to make decisions about whether to make adjustments to enable you to generate more sales, service your customers better or manage your resources.
Examples of lead indicators are the number of leads, customers that come into your store or sales appointments you make in a week.
The more leads, customers and appointments you have, the more sales you’re likely to achieve. If you’re in a service-based business, the number of jobs booked in is a lead indicator of sales or fees you’ll generate as a result.
If you track the relationship between lead and lag indicators, you can easily see mid-month if you’re not generating enough store traffic or booking enough appointments to result in the sales you need to achieve.
With this knowledge, you can double your efforts to improve the lead indicators and make sure you achieve the results.
All of this is about achieving better results, building a better business and realising a better financial result. It’s the natural state of a business to grow.
It’s also natural for a business owner to want their wealth to grow. To do this you need a comparison or reference point from where you were versus where you are now and more importantly where you want to get to.
That comparison could come from benchmarking against others in your industry or best performers in business regardless of which industry they come from. There’s nothing like a bit of healthy competition to spur you on to become even greater than you already are.
Or you could focus inwardly and compare your own business performance against monthly budgets you set for the year, or by comparing your whole year financial results against the prior year.
Failing to do these internal comparisons means you have no clear sense of how things are progressing or even knowing if you are in fact progressing or actually going backwards.
On a finer level, comparing your performance and results, helps you to uncover variances and patterns.
You can use this information to understand the negative impacts you need to put measures in place to prevent occurring again, or to spot opportunities you can capitalise on.
Once again, if identifying and interpreting financials isn’t your strong point, make sure you have someone on your team, whether employed or outsourced, that can help you do this.
This probably sums up why a lot of business owners don’t have the right financial management approach to suit their business. At some point it sounded or became too hard, complicated and over-engineered.
There are so many systems you can choose and numbers you can gaze at and measure, without gaining any real understanding. Paralysis by analysis becomes the end result.
The key is don’t get caught out and confused on the fly when a problem arises and you’re struggling to understand what went wrong.
Invest a little time when you’re starting the business to implement the right financial management solutions for you, and then tweak it every year after that to make sure it stays relevant to your business and to you as its owner with the highest financial expectations and vested interest.
Marc Peskett is a director of MPR Group a Melbourne based business that provides business advisory, capital raising, grants services, as well as tax, outsourced accounting, finance lending and wealth management to fast growing small to medium enterprises. MPR Group is a member of the Proactive Accountants Network. You can follow Marc on Twitter @mpeskett
