by Larry Chester
CFO Simplified is an IMA B2B Partner
Every business owner is buried by information. There aren’t enough hours in the day to read, digest and then decide what you should act on. So how do you decide what to deal with today that can’t wait till tomorrow? Many business owners have dashboards that tell them how their companies are doing. Some electronic systems continuously scroll information about the company. Some use reports that are created weekly or monthly for the management team.
It’s nice to have that information, but all those reports and all those numbers could cause your eyes to glaze over. TMI – Too much information. Even when you get your financial statements at the end of the month, what should you pay attention to first?
If your company is operating smoothly, you don’t have wild swings in your numbers. But they always will vary somewhat from month to month. Many skilled executives “Manage by Exception.” As the owner of a business, you know what the numbers should look like. They probably get a bit humdrum from month to month. But every once in a while, you see a spike in some particular operating expense, or a drop in sales of an individual product, or a higher payroll cost than you’re used to, or a sudden slower turn of inventory.
These got your attention because they were out of the norm, they were an exception to what you normally see. Some very sophisticated ERP systems have parameters that you can set as standards in your company’s operation. Then if any of those hundreds of standards are violated, the system sends a warning message by email to the managers or executives tasked with overseeing that part of the company.
The exception has been identified. In short order, the manager can act on that operation. It might be too many phone calls put on hold. It might be an order that wasn’t shipped within 24 hours. It might be that inventory levels have exceeded 3 months of sales.
So how are you managing your business? Have you identified those critical KPIs that tell you how smoothly the back office is operating, how well the shipping department is working, or how quickly your open invoices are getting paid?
You don’t need a sophisticated ERP system. You just need to identify levels of performance that you regularly achieve and watch out for exceptions. When you look at your financial statements, don’t just look at one month, look at six months all next to each other. Identify which particular line items are “not like the others.” And don’t just look at the raw number, look at it as a percentage of sales, or match it to the number of full time employees, or the number of hours worked in production, so you can identify the aberration, the exception. Then jump all over that number. Walk it back up the production line to the source. Find out what happened to cause the change.
You will not only fix that result and improve your bottom line, but you will also become much more aware of how your company is operating, the items that have the biggest impact on your bottom line, and the changes that you can make to keep those important numbers, Gross Margin and Profitability, heading in the right direction.
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