It is very important to know how the business is performing, so that decisions can be made about how things are being done. The more frequent and up-to-date reports are, the more useful they are.
Lack of control is one of the major reasons for business failure.
On the other hand, successful entrepreneurs believe that knowledge is power and they use it to make continuous improvements. They develop effective accountability systems to monitor and control and use key performance indicators. These keep track of where they are and how the business and everyone in it is performing. This extends from the basic financial statements that keep you in touch financially, to non-financial measures that keep track of productivity and efficiency in many areas of the business. The controls are like a business cockpit where the business owner can keep track of the business just like a pilot in a modern aircraft.
Influence vs strategy
In a growing business, you need to learn to control performance more like a general than a drill sergeant. Where the drill sergeant is on hand to see everything that happens, a general controls activity at a distance. A drill sergeant’s influence is restricted to the number of troops he can see and shout instructions at. Usually about routine manoeuvres that happen all the time. In contrast, a general plans a strategy, gives specific instructions about tactics to specific people who will implement the tactics. They then receive reports about results from people whose job it is to provide reports. Then, depending on what is contained in those reports, the general adjusts the tactics and revises instructions to suit the results that are being achieved. A general can command and control the actions of a whole army. To do this, the general uses different methods to become informed about the results being achieved.
It is very important to know how the business is performing, so that decisions can be made about how things are being done. When financial reports show performance is not up to the mark, or indicate a negative trend, changes can be made in order to improve results. One of the results of the way many owners operate (ie without set goals, and caught up with just doing the day-to-day tasks) is that results aren’t that relevant. Knowing the financial result doesn’t change the day-to-day pressures. Therefore, the owner continues to react to the pressures, and results continue to be the same, or worse. This is the symptom of an out-of-control business.
Defining targets for control
The knowledge of how the business is performing financially is made more relevant when a business plan is in place. This details particular goals and financial targets, or milestones, to be reached by certain times. This is the essence of control, rather than simple measurement. Many managers and even accountants make the mistake of regarding a profit (any profit) as a good result and a loss as a poor result. When, as a result of business planning and target setting, a certain level of profit is required for a particular period, any result less than that target level of profit is a poor result. This can be the case even when the business is quite profitable. However, if the actual profit is less than the target profit, it means that the business is less likely to achieve its goals.
The important thing about keeping score and receiving frequent reports is that when actual results achieved in the short term are less than the target, operations can be reviewed to investigate areas where savings can be made or where performance can be improved. Before the situation deviates too far from the medium-term target result. If reports are not produced frequently, too much time may elapse before substandard performance is detected. For the business receiving annual financial reports only, by the time they are received, it is far too late to do anything to change the result. And often it is far too late to save the business.
The frequency of reporting is critical to controlling success. For some businesses, the focus is on preventing substandard performance. These businesses normally produce information quarterly, or perhaps monthly, to ensure that problems are detected early enough to prevent performance from deteriorating too far from the objective. However, other businesses use more frequent reports. In a manner similar to the way a Formula One racing team uses instantaneous reporting to fine-tune its car to achieve peak performance.
The more frequent and up-to-date reports are, the more useful they are in providing information for making management decisions. Some businesses are able to use ‘real time’ data that gives them almost instantaneous information on some particular aspects of business performance. In this information age, making the best use of up-to-date information in an effective control system is one of the major keys to success.
Read about other business mistakes in Greg’s previous articles for this series: The first critical business mistake, The second critical business mistake, and Ineffective delegation: the third critical business mistake.
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