Today’s businesses are inundated with data. Finding the right way to utilize this data can be overwhelming. As a result, many businesses either don’t report on anything or they report on everything – yet neither situation is helpful. How can you organize your company’s financial data so that it is useable and helps you drive critical business decisions?
There are a number of ways to answer this question. With our clients, we focus on ways to simplify how they approach their data. This process starts with outlining your goals, determining what financial metrics or levers impact those goals and then gathering the right data that feeds into those levers. For many of our clients, we help strike a balance between gathering enough information to provide a meaningful assessment, without getting into too much detail. Once the data is gathered, the focus then shifts to a more dynamic evaluation of your business. If you find yourself overwhelmed with information and are not sure how to make it work for you, the following process can help you get started.
Where to begin: Make sure your data is well organized and set up for analysis
Making informed decisions at your firm should involve a regular evaluation of your financials, but if your books are a mess, the first thing you’ll want to do is clean them up to make sure that your financial data is clear of errors. Some clean up can and should be done on your own, while other, more complex issues should be left to a professional. Before you make any changes, make sure you’re clear about issues that may be too advanced to tackle on your own and hire a professional with a strong understanding of accounting principles to ensure modifications are done right.
Next, you’ll need to consider your goals and objectives and which financial metrics are relevant to help you achieve these goals. After you determine which metrics apply, you’ll want to make sure your financial reporting is organized to use this information and help you record progress toward your goals. But strategic thinking doesn’t stop here. Your financial data is not the only thing you need to make informed decisions. Many decisions involve a number of moving parts that must be thoughtfully considered to continue to progress.
Improving performance is a dynamic process
One of the most common obstacles we see our clients face in achieving their goals is that many forget that improving their company’s performance is a dynamic process that involves multiple facets. Think of it like a Rubik’s Cube. You can focus all of your time on getting one side perfect, but this will most likely leave the others in total disarray. Thus, it is critical that you consider the balance or other side of the equation when you start to make changes to improve performance at your firm. This involves thinking through the impact one change might have on other parts of your business and strategically plan to alleviate pressure that results from these changes.
The most common areas businesses wish to improve include: increasing net profit, enhancing staff engagement, and boosting customer satisfaction/retention. We’ll work through examples to show you how we recommend our clients work through improving these metrics.
Improving net profitability is a common goal for any company. There are three key levers involved in improving net profitability. You can 1) increase revenues, 2) reduce cost of sales, or 3) reduce overhead. This means if you’re not meeting your profitability goals, you’re either not charging enough, your cost of sales or (cost of goods) is too high, or overhead costs are out of line with revenue. Your objective then is to determine which of these three levers are costing you margin and then create a strategic plan to address the issue.
If, for example, you determine that your pricing is competitive with the market, then undercharging is not the issue and you should turn your focus to cost of sales and overhead. After determining that overhead is too high, you might look at your largest expense buckets and consider where you might cut costs. Again, before a decision is made, it must be carefully thought through. Some companies, for example, spend more than average on rent to operate in a location that helps them attract and maintain good talent as well as new clients. A decision to cut this cost and move to a lower-cost location will help improve profitability, but it is also likely to change both employee and client perception of this business and could impact staff engagement or client retention. Therefore, decisions like this must be considered thoughtfully in light of how they might influence other strategic endeavors.
Alternatively, if you determined that 70% of your customers are paying a good rate while the rest are too low, you will know that your next step is to build a strategy around how to increase fees on these accounts without hurting customer satisfaction/retention in the process. The other side of the Rubik’s Cube in these examples may seem obvious, but not all business dynamics are as apparent.
Staff engagement is a good example of a less obvious factor involved in improving performance, as it is much harder to measure. Let’s consider a service company trying to improve profitability as an example. If the company has determined that pricing is competitive and overhead is running lean, the focus then becomes cost of sales (remember that cost of sales for a service business is largely made up of staffing costs). For a service business to improve this metric, they must develop a clear process for managing billable hours. Many of our clients have made changes to improve how they track and manage employee time to enforce more efficient project management and ensure projects stay on budget.
While enhancing the efficiency of billable hours is critical to addressing high cost of sales in this case, it’s crucial to also consider how new requirements might impact employee engagement. Demanding more of your employees without aligning their interests may not only backfire by reduced productivity, but complacent employees can also sour customer relationships. In this situation, your attempts to reduce cost may actually increase them.
Thus, when it comes to staff engagement, implementing new policies that directly impact your employees should include a thorough evaluation of potential negative consequences. Solutions may be simpler than you think. Often, it comes down to the culture you’ve created at your company and what you do to ensure your employees are engaged – even if you have high demands of them. Some companies allow more flexibility with time off or have a reward system that grants profit sharing to reward company-wide results. Ultimately, your plan should incorporate alternative ways to improve employee engagement by considering what really matters to your employees.
Customer satisfaction and retention is another common focus for many businesses trying to improve performance. How do you retain happy customers? Often, it is directly correlated with staff engagement. For some businesses, this is easy, but for others, inherent challenges make customer relationship management difficult. For example, we work with a company that requires highly skilled technical expertise. The company’s technical employees, while highly engaged in their work, lack the soft skills necessary to handle customer relationships. For them, it’s a skills gap. The strategic decision then becomes how to address the issue to support your staff, without taking away from their engagement in technical work. Again, this decision cannot be made in a vacuum.
One solution may be to increase spending on corporate training and work with these employees to improve their customer relationship skills. Alternatively, investing more time and/or money on recruiting to find employees that strike the right balance between technical expertise and customer service skills may be a better solution for your firm. Proper consideration of the challenges on both sides will make handling situations like this clearer.
As you make critical decisions at your company, it is important to include an evaluation of financial metrics as well as thoughtful consideration of the big picture. In our experience, when clients take the time to clearly outline a plan and strategically consider how changes affect all sides of their “Rubik’s Cube,” rarely do they go wrong. Simplifying your reporting by evaluating the financial metrics that will help you achieve your goals and then making decisions with opposing forces in mind will prevent surprises from taking you off track.
If you need assistance setting up your financial reporting to help you achieve your goals or if you would like to discuss how you might improve your financial reporting process, we would love to help. Gemsbok’s professionals have over 15 years of experience developing and reporting on key financial metrics and have helped hundreds of firms grow and improve their business. Give us a call at 303.249.4687 or email Christina at email@example.com to set up a time to discuss your business and its goals.
Christina Griggs is a financial expert and spreadsheet maven that has spent her entire life in and around the business world. Christina has worked as a short-interest trader in London, as an investment advisor with Dean Witter (now JP Morgan), as CFO for a corporate housing firm and CFO for an eCommerce marketing agency. This experience, along with her client work at Gemsbok allows her to continue to cultivate her enthusiasm for financial analysis. Visit our website or contact us for more information on our firm and services.