Driving business performance – Financial and non-financial indicators
Understanding the impact of the leading financial and non-financial indicators that drive your business isn’t something that is always clear from the outset. This is intellectual property that is generally built up over years of experience through a process of trial and error. Yet it is critical information that impacts the ability of a business owner to ultimately receive a return for the fruits of their hard work and energy, so isn’t it imperative that it is clearly understood from the earliest stage of a business’s life cycle?
If a business owner can’t articulate what needs to be measured, monitored and refined to have the maximum impact on their investment return, they may need their adviser to walk them through the discovery process and then design and develop a framework that measures, analyses and reports on these indicators.
Two key questions to consider are:
1. Are they looking out of the rear-view mirror or looking through the windscreen?
Differentiating between leading and lagging performance indicators is crucial if you want to impact change in your business. The profit and loss, balance sheet and cashflow statement provide an image of what has transpired but nothing about those reports can be changed or influenced. They need to be a measurement tool of the impact of change. What drives business performance is the ability to impact leading indicators. More information on budgeting and cashflow can be found here.
2. Is it only financial indicators that impact the business performance?
Typically, business owners look solely at financial indicators for understanding and implementing business growth. Yes, they can be important, but they are not the only critical drivers of business performance. If they pared it back, what are the most critical drivers to business performance and success in the business? Does customer satisfaction, average delivery/service time, wastage, product range and sell through, employee turnover or warranty returns impact the business performance?
Non-financial indicators can often be the most important indicators, but equally the most difficult to measure, monitor and therefore improve. Effecting positive changes in these drivers can have a massive financial impact on cash flow and equity growth.
Until business owners invest the time to understand the key drivers of profit, cash and equity growth he/she is relying only on instinct to influence and impact their business. That might be fine when economic times are good, but if the pendulum swings then the business can quickly become a rudderless ship. The problem is that the pendulum can swing pretty fast.