Let’s have a look at the importance of and the relationship between financial accounts, management accounts and Key Performance Indicators (KPI’s).
Now this has all the hallmarks of being a dry boring article but don’t despair and dive for the headache pills just yet. I’m going to look at this by the way of a metaphor to bring some clarity and understanding to the subject.
We are going to embark on a little boat trip. We want to motor our boat from England to Holland.
So we need to do some planning. First off we must get the charts out and plot our route. What information do we need?
Well we need to know the weather forecast, the expected wind direction, the state of the tide and the strength of the currents so we can calculate our bearing to reach the destination.
We will also need to know how many passengers we have on board, the average full consumption, the overall distance so that we can calculate how long we will be at sea and therefore how much fuel and other supplies eg. the food and drink we are going to need for the journey. Quite a lot of info and planning. In a business this would be the budgeting or forecasting stage.
But hang on a moment have we forgotten something really basic. Surely, we really need to know exactly where the boat is moored. Not just the area but exactly where a boat is in which marina because that is where we are going to set off from. We may have done all our plans but if we don’t know exactly where we are starting from we are unlikely to reach of destination. In business terms the location is a set of accurate timely financial accounts. No good trying to start from where the boat was a year ago as it could be somewhere totally different.
Now knowing exactly where we are- we can jump on board and plan our course and then safely set off on our journey. We monitor our speed, fuel consumption, distance travelled and keep an eye on the compass, tide, wind speed etc. In business these measurements would be our operational KPI’s. These give us up to date information that we are on course and we are going to reach our destination. We can control the business by the KPI’s.
Now on route we need to check our actual position against where we think we are. Maybe we take a GPS reading and find out we are fifty miles off our planned route and are heading for some nasty sandbanks. In business this GPS reading is equivalent to the management accounts. These need to be accurate and up to date. It’s no good knowing that the boat was off course an hour ago or the management accounts are one, two or three months late. The information was there but no one bothered to tell the captain. Also it’s no good telling the captain he is off course without telling him how he got there. Perhaps the wind has shifted, blowing the boat off course. Knowing that, the captain can recalculate the bearing and bring the boat back on course.
I have spoken to many, many business owners over the years that have no idea which Ocean their boat is in let alone the direction they are headed or indeed the final destination. Often the captain (owner) is not too worried as they know there is plenty of water under the keel (large cash balance in the bank) and there are no storms brewing. In fact the skies are clear and blue. The boat can just chug along merrily, oblivious to the changes going on around them until it’s too late.
Unfortunately, in nature and in business we have seen over the last few years the climate change. Storms and sudden squally showers are becoming the norm. What served us in the past will not help us in the future.
So perhaps by looking at the importance of the inter relationship between financial accounts, management accounts and KPI’s we can gain, regain or maintain control over our business in these changing times.
To finish, here is a brief relevant extract from my book ‘The Levels- Can Your Business Step Up to the Growth Challenge?’ (Page 143)
You cannot make sound business decisions and grow through the Levels without tackling your financial understanding, forecasting and planning.
I know that, for many business owners, the idea of getting to grips with the finances takes them straight back to a time when it was easier to feign sickness than attempt double math’s, but this is an absolute necessity and with the right resources it doesn’t have to be as painful as it sounds (I promise there are no quadratic equations involved in any of this!).
The language of business is numbers and, just as on an overseas holiday it is helpful to have a basic understanding of the language spoken, a business owner needs to have a good enough grasp on the language of numbers to understand what’s going on within their business. Without the numbers, we are once again relying on opinions rather than the facts and that is something which can result in bad decision making about where the priorities for the business should lie.
I am not saying the owner needs to be fluent in that language. They can always hire an interpreter (an accountant) if the conversation becomes too complex or detailed but having no understanding of the language is like being stuck in the middle of Athens without a map. There are road signs everywhere and plenty of people willing to give you directions but if you can’t read the words or understand any of the lingo, you have no way of knowing which way to go. With good luck, a little judgement and the use of some slightly mad looking sign language you may well eventually get to your destination but the journey could be a very long and winding road!
As any world travel enthusiast will tell you, if you can grasp the fundamentals of a language you will gain a deeper understanding of the complexities and nuances of the country where it is spoken. Basically, your enjoyment of the trip will be much improved.
So, in Setting out the Stall to face the TRANSITION from Level 2 to Level 3, the first thing you have to do is put in place strong financial controls and management information that is capable of allowing you to go to the next Level and beyond. Start by making a review of your current information system and take a look at the information it is providing.
There’s no time like the present so you can do this right now!