Visibility on operational activities

 

What is the level of concern you currently have over the financial visibility in your organisation?

 

Are your management accounts providing the timely, accurate and meaningful information you need to navigate today’s uncertain economic environment?

 

Generally, if you are concerned then you may need to consider taking some action. If your level of concern is low then it may still be worth discussing with your management team to ensure the company is confident of stained success and also consider if there are any ways to look at improving the effectiveness of operation.

 

What is your current confidence level?

 

A very simple matrix can be used to help assess your confidence levels and is provided below.

The level of visibility refers to financial visibility and not just what the management accounts imply. It’s important to stress that management accounts are still prepared for ease of use for accounting personnel. In technology companies, you or your fellow management team may not automatically see the insights that the list of numbers is telling you.

 

If you have a high concern, action should be taken immediately. It may be that your concern is based on instinct that something is just not right. This can be very powerful but is crucial to understand what exactly is not right so meaningful corrective action can be taken.

 

Are you getting the insights you need to make informed decisions?

 

In any operational or financial report, it is the INSIGHTS that are important. Generally, the numbers will change each month or quarter and you may become relaxed or relieved depending on the actual bottom line number. There are a multitude of operational factors that will impact this number. Generally, the bottom line number will :

 

  • Fluctuate, sometimes wildly.

  • Trend down

  • Trend up.

 

In each case, it is vital to understand what is causing the variations and not rely on opinions, or accept market conditions or other such non quantifiable conditions. Even in perceived good market conditions, you could be haemorrhaging cash or underperforming and losing competitive strength.  

 

A trending down is obviously the main cause for concern. It is however, important to understand the context. Are you investing in new technology or facilities to prepare for changing client demands or market conditions? The cost of these investments will impact your results but if you are unclear by how much, then you cannot be certain what is impacting your performance. Have you carried out sufficient investment analysis to determine budget spend per month and when you are likely to see a return/generated income? Do you have budgets? Without a clear understanding of where to “filter” from your results, you may postpone taking corrective action, or worse, take the wrong action in the wrong area.

 

A wild fluctuation suggests some instability in your operations. This may be acceptable and due to fluctuating demands by clients, variable income etc. It may be worth checking how this fluctuation relates to your operational model. If you have structured the operation to provide a steady income stream in a stable market, then fluctuations could be a sign of significant instability. If left unchecked, this could result in some nasty surprises.

 

A trending up is of course very positive. Should you forget about matters and move on to more interesting activities? Up to you, but we would recommend that you investigate ways to further enhance your operations. Generating cash reserves can be a very prudent move in economic uncertainty. More profitability leads to more choices for the shareholders. With a decaying cash position, your choices become much less attractive.

 

What action should you consider taking?

 

This very much depends on your organisation, its current status, the financial pressure the organisation is under and the appetite for implementing any change. To help with a few general suggestions and referring back to the matrix, some options are :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

If you have financial & operational modelling and budgets, these will help inform you what you need to consider in your review of the management accounts. There are a multitude of other activities that will impact the results and are not covered here. If you are unclear on what your investments in development or facilities works, should be costing you each month, it is worth performing an analysis to isolate these expenditures so you can better understand any issues in the day to day operational activity.

 

One method of helping you gain visibility to gain insights is through the use of presenting your financial data visually, with trending analysis to gain quick insights. Charts and dashboards can help provide such clarity. You can find further information here

 

 

Other key metric analysis. There is a lot of confusion on how to choose the right metrics for your business. Valmar Group his writing an article [in progress] that may help. 

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