Understanding context in your numbers (August 2017)
For many SME owners, the use of management information (MI) as a decision-making tool is still a relatively new idea. Even for those businesses that are using regular reporting and forecasting there is the danger that the wrong interpretation of their MI can cloud everyday decisions. Large organisations cannot operate without detailed number work and they have become sophisticated in how to use such information so there’s absolutely no reason that SME’s should not follow the same path but before they embark on financial analysis of their business, owners and directors need to understand what their numbers are telling them.
You don’t have to be an accountant to recognise that when comparing figures some have gone up and some have gone down. However, what underpins the headline numbers in your monthly accounts (and I say monthly because if you are serious about growing your business you cannot do so without regular monthly financials, both historic and forecast) is where the real value is added to a business. It’s not enough to say that sales have risen due to several new customers or the launch of a new product range. You must understand what you are selling to which customer, the margins for each product or service, geographical implications, departmental and divisional splits, and these are just the basics.
In addition to the breakdown of your headline numbers you must understand the circumstance or context in which they have been achieved. For example, if you employ 2 people in sales but are looking to reduce that number to 1 you would probably look at the value of orders won in the last 12 months as a starting point. So, let’s say salesperson 1 has orders for £500k and salesperson 2 £200k – it seems a straightforward conclusion that salesperson 1 is far better and if you’re looking to streamline the team it would be salesperson 2 that you let go. However, if you have robust MI you can drill down further into their respective numbers. This analysis then shows that of salesperson 1’s business £400k is down to repeat orders and the extra £100k is from customers that had already expressed interest prior to the current year but salesperson 2’s orders are from new customers for products that have only just launched. This additional information throws a whole new light on the performance of the sales team. The context of the sales analysis is therefore critical to your decision-making process.
Another good analogy is football terminology. If you ever listen to commentary of a football match you will always get possession statistics thrown at you – they are meaningless and serve only to confuse the real pattern of the game. Shots at goal are a fundamental figure used, but we can go a level deeper with that number to look at shots on target, and then another layer still with conversion to goals. It’s the deeper analysis of the headline number that shows the true performance of the footballer and business is no different – the layers of financial information paint a picture of how a business performs and can capture what may otherwise seem to be intangible, things like human behaviour and the organisation’s culture.
For many businesses, the ability to capture the correct amount of context within their reporting is difficult – too detailed and the numbers can become confusing and difficult to communicate, but too simple and there’s not enough detail to make meaningful decisions. Therefore, working with commercially thinking finance professionals that have an impact on your day-to-day business is essential if you are serious about growth, being more profitable and putting cash in the bank.
Written by Steve Bull, Owner and Director at Elite MI Limited. To further understand the context of numbers in your business contact Steve by e-mail – email@example.com or on his mobile 07940 982060.