Its 6 months after the year end, and the accountant has just completed your financial statements for a period of time that ended 6 months ago.
For any small or medium sized business, assessment and measurement of performance activities typically do not take place in any meaningful way.
Why? Its the typical reasons of not enough time or not a priority and so on. So measurement is more based on money in the bank account or level of credit being utilized at any given point of time.
Ok, so maybe we can agree that there is room for improvement here and that better understanding of current financial performance of any business entity is of value in helping to profitably operate a business. I don’t think any of the above is a stretch.
So what do you measure and how do you go about it?
In terms of what, there are numerous things to consider here which will depend on the specifics of each business, but in general the primary financial metrics are assessment of actual revenues and costs against budgets or projections.
Now while typical management accounting can be performed in house or through an accounting firm, the numbers by themselves only tell part of the story.
The benefit in review and assessment is to be critical of what you see and to relate financial performance back to your strategy, the market place you operate in, the initiatives you’ve undertaken, proposed future opportunities, and so on.
To get the most out of a financial performance assessment, many business owners will bring in an outside party periodically to sit down and go over the financial performance reports with the business owner and managers to provide an unbiased opinion of the business enterprise and its current performance.
The third party needs to be someone who understands strategic planning, operational implementation and execution as well as financial measurement. By default, the external business accountant tends to fill this role and in some cases, can can considerable value. However, in many situations, accountants do have enough experience in strategy and operations to provide real value in these exercises regardless of how much they claim to know about management accounting.
Basically third party input can be very helpful, provided its from a knowledgeable source.
When To Assess
In my opinion, the minimum should be at least once a year, which in many cases is too long an interval. Semi annual or quarterly assessments will yield more actionable results versus annual financial performance assessments that are still more historical in nature due to the amount of time being covered.
With everything going on in a business, it IS hard in most cases to create this type of assessment discipline. But then you have to decide if you want to know if you’re heading for a cliff in time to make a course correction, or if you would rather just hope there are no cliffs ahead of you that can’t be easily seen.
If you’re business would like to improve this process and get solid third party input, send me an email and we can discuss it further.