What You Can Measure, You Can Manage for Lawyers and Business Owners
One of the difficulties I have as a business advisor is to persuade business owners to spend less time working in their business and more time working on it.
This can be a scary proposition for many business owners, particularly those with deep expertise and experience in the product, market or industry they operate in as they feel that no one else can consistently deliver the same level of quality to customers. Their fear is that customers won’t be happy if they are not personally servicing the customer, especially if they were personally involved in the sales process. The challenge for these business owners is to adopt a mindset of focusing on managing the process to find, train and/or retain the right people to sell and deliver the products and services which involves developing systems which models best practice (or, at least, how the business owner does things and wants things done).
As a forensic accountant, I am often asked to provide expert opinions as to the likely profitability and cash flow of a business, whether it is for a claim for loss or a valuation. This typically requires one to dig beyond the annual historic financial reports and consider the management reports. What is communicated in the management reports, and to whom they are communicated to, can be quite informative about the culture and mindset of business owners with regards to their intentions to genuinely grow their business. The absence of management reports may make a claim for loss or valuation subject to more contention.
What should be included in management reports and how often they should be prepared (monthly or quarterly) is at the discretion of every business owner. The management reports should include actual profit & loss and balance sheet information at minimum. Ideally this information should be broken down so actual financial results is reported by divisions, departments and/or locations (if relevant) which should be compared to budget with variances analysed and explained. The variances may be explained by reference to key performance indicators (KPI).
It would be fair to say that ‘sales’ is key driver of the success of any business. Unfortunately, too few businesses systematically track and effectively analyse sales KPI which allow business owners, managers and other interested parties to take some comfort that the business is heading in the desired direction. The following are some examples of KPI which may be useful to include as part of the management reporting process for some service orientated businesses (the relevant KPI will be different depending on the nature of the business):
- the number and source of new enquiries per month. Understanding the source of enquiries is valuable as it will help assess the likelihood that the enquiry will result in quality sales (eg a new enquiry from a referral client is typically considered better than an enquiry from the yellow pages directory as there may be hidden costs associated with the later eg additional sales costs and collection risk);
- comparison of the number of new enquiries per month to a target. Any deficiency could indicate that further attention on sales and marketing processes to boost quality new enquiries is required;
- the conversation rate of new enquiries into sales. All enquiries should be following up to understand why some new enquiries to do not convert to sales. A low conversion rate may be due to the new enquiry coming from marketing directed to unqualified prospects or may be due to poor sales processes;
- sales by customers, including average sale price and number of repeat transactions by customer. It is may not be unusual for 80% of sales to come from 20% of the customer base, however the business would not want to be exposed to significant dependence on key customers; and
- average stock/WIP and debtors days per customer.
The above information can be highly insightful when it can be analysed on paper and used as a basis for strategic discussion, claim for loss and/or valuation. Unfortunately too many business owners claim to have a ‘gut feel’ in relation to the above KPI and many baulk at the thought of spending time on developing strong management reporting systems. While a pure ‘management by the numbers’ approach alone is not advocated, it is always useful to have hard quantifiable information to make quality decisions, especially when the objective is to grow cash flow and profitability. The absence of strong management reporting systems leave business owners at the mercy of reactive decision making without really addressing the real drivers of growth and the causes for lack thereof.
I would always encourage that senior team members of any business to not only contribute to providing the inputs into the management reporting process but to also see the outputs and variances to help them ‘buy-in’ to the process of improving the business.
As a forensic accountant, my job is always much easier when the business owner has a strong management reporting process in place to support a claim for loss or valuation. As a business advisor, it is always a pleasure to work with business clients that want to allocate time and effort into managing their business rather than working in it.
If you are business owner interested in designing or improving a management reporting system for your business or you are a litigator and want to know more about the relevance of a litigant’s management reporting process in disputes, please call on 02 9411 5422.