By Maurie Cashman
Today, we look at Financial Measurement and Management, which includes the following items:
- Understand and use existing financial information;
- Manage and reduce company debt;
- Implement financial controls; and
- Increase employee productivity.
In past weeks, we have discussed how owners can methodically build the business value necessary to achieve the post-business ownership lifestyles they desire.
- Create a written value-building plan that includes important steps to closing the gap between what you have and what you need:
- Address business fundamentals necessary to protect the value to be created;
- Take action to diversify the customer base, solidify the marketing message and avoid unnecessary taxation;
- Systemize internal operations including collecting customer feedback and diversifying vendor relationships;
- Leverage human resources to improve the productivity, efficiency and quality of employees.
Understand and use existing financial information. We frequently work with successful business owners to make better use of their existing financial information so that day-to-day activities and requirements donâ€™t overshadow broad and strategic planning. When you started your business, you had a strategic vision and you can reconnect with that vision by regularly setting aside a reasonable amount of time to track your companyâ€™s performance from an objective and quantitative perspective.
We have also noticed that for many owners, their understanding of financial systems and controls does not grow at the same pace as their businesses grow. This is a critical mistake because finances become more important as the business grows: more is at stake, more sophisticated measurement tools and controls are needed and tend to be more affordable.
At a certain point most owners need outside help and consulting. At its outset a company may be well served by a bookkeeper. As it grows it uses the services of a CPA and then finds it is best served by an internal Chief Financial Officer. Over the years, the owner travels from checking a simple financial statement to learning to use professional advisors to using sophisticated financial information and systems to make business decisions.
This is a critical and difficult decision for business owners to make. They assume that their advisors are watching out for them. They assume that their bookkeeper or CFO is on top of everything. What they miss are three critical factors:
- Their advisors will often limit financial measurement advice to exactly what they are being paid for to protect themselves from liability. If you are being paid for compiled financial statements, do not expect a lot of advice on how well you are managing the business financially;
- Both internal and external advisors will become so familiar with your business that they stop questioning things. Many owners are working with people that their father worked with when they took over. While these may be excellent people, they may have become comfortable and are no longer challenging you on your financial measurement;
- If they arenâ€™t challenging you, who is? Do you need an outsider who doesnâ€™t have an ingrained view of your business and your industry that can ask hard questions?
Manage and reduce company debt. Company debt is not inherently negative. In many cases, loans from outside financing sources facilitate growth more quickly than can be supported through internal financing of business opportunities. On the other hand, debt can also create additional stress and prevent growth by tying up needed cash flow. For these reasons, we often recommend that owners create strategic plans to manage the debt that supports business growth and growth of business value and to reduce debt that stifles growth and value.
Implement financial controls. Building value without specific financial goals and measures usually results in a less efficient path to success. Performance goals and limits provide the framework for successful operations and a more valuable business. As you develop quantifiable measures for your financial commitments and expectations, you create a more dynamic relationship between internal financial decisions and objective business value.
Increase employee productivity. Are you frustrated because you feel you are too involved in the day-to-day operations of the business or do you have a nagging feeling that employees could demonstrate greater productivity and efficiency? Do you need ways to work with your management level employees to drive the productivity of your employees? When employees consistently perform at the highest levels of productivity and effectiveness, the business deserves the premium value that buyers associate with a high level of productivity.
Next week, weâ€™ll look at Benchmarking and Measuring Success. If, in the meantime, we can answer any questions you may have about the many ways you can use financial measurement and management techniques to increase business value, please give us a call.