I find it increasingly disconcerting that the skills needed to run a company come more from accountancy rather than my own discipline of engineering. Financial information is the dashboard of the company; it defines where you want to go, it tells you where you are going and where you have been.
There are 3 fundamental types of financial control.
Pre-operational Control – This is essentially, business planning and budget setting. It involves translating the business plan into monthly, quarterly or yearly financial performance measures, covering sales, costs, contribution margins, profit, cash flow forecasts, etc.
Operational Control – This is a continuous process that involves attempting to forecast where each performance measure will be next week, next month, next quarter, whichever is appropriate and comparing it with the planned budget position at that time. Management actions can then be initiated that will bring any deviations against budget back on track. It is a good idea for the management team to get into the discipline of undertaking this review at the same time at least each month, but better still each week. In our company, this was done at 8.00 am every Monday morning without fail, which had the effect of kicking us all into gear after the weekend.
Post – Operational Control – This involves looking back at your management and financial information and the effectiveness of your corrective actions in assessing whether or not there needs to be any fundamental changes to your business strategy or timing of your objectives.
If this subject is new to you there is an excellent book, designed for the non–accountant called “Key Management Ratios – How to analyse, compare and control the figures that drive company value” by Ciaran Walsh, published by the Financial Times Masters Class. It is well worth picking up next time you are going through an airport.
The ability of a company to generate timely accurate financial information and key performance indicators about the business is absolutely essential. This information forms the basis upon which your management decisions are made.