Financial Metrics are Great, but Don’t Forget These Two Critical Items

Posted by Rock LaManna

a resized 600Financial metrics are the window to the soul of a business.  They’re the starting point for all the strategic planning I do for my clients.  From financial metrics, I can tell where operation pain points arise, but I also need to look at two other essential components before I can accurately evaluate a business.

1. Operations.  Financial ratios can show us how efficiently you are at managing operations and capital.  Your inventory turnover and your accounts receivable turnover can speak volumes, for example.

These numbers point us in the right direction, but we next have to engage with your team to really find the source of the problem.  

Business Coach Doug Wick of Positioning Systems once told me of a story about a company that was experiencing poor productivity from one of its three production crews.  The numbers helped him pinpoint where the company was lagging.

But it wasn’t until he engaged in one-on-one interviews with the management and the workforce that he understood the cause for the drop-off.  There was extensive miscommunication and a lack of standardization in procedures.  The manager was not effectively and consistently communicating with his team, and production suffered as a result.

Which brings us to the second component…

2. Leadership.   Consider the two steps we’ve covered so far.  From the baseline financial metrics, we’re able to isolate where the company is having problems.  That’s a quantitative assessment.

Next, we conduct a qualitative analysis of the operations.  We look at how people work – or in this case, don’t work – and isolate the core issue.  

All this is great, but it’s wasted unless you have effective leadership to initiate a change.  For example, was Doug Wick’s company willing to engage in what might be a painful, face-to-face confrontation with the shift’s manager?

Were they willing to undertake what might be a grueling re-evaluation of how things are being done, and revamp them in the correct manner?  You can lead a CEO to corrective waters, but you can’t make him or her drink.

As an owner, you need to provide the push your organization needs to make long-lasting change.

Financial metrics are undoubtedly the launch pad for isolating a company’s problems or opportunities.  But you need to integrate qualitative measurements, too.  Operations and Leadership are critical pieces of the puzzle.  Make sure they a key part of your analysis.

Photo by: elirook

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