Thinking Outside the Net Income Box. How Does Your Organization Measure Success?
What’s your financial elevator speech? In other words, let’s say you and I were sharing an elevator up to the 13th floor (okay, the 12th) and I asked you, “What do you need to accomplish within your organization to be truly successful?” What would you say? After the initial shock that someone would ask you that question in an elevator, can you think of three things that you need to achieve for your organization to thrive?
Whether your list is three things, five things, or ten things, I hope this is an exercise that you have conducted within your organization. Maybe your goal is expanding sales to other geographic markets, enhancing relationships with customers, achieving associate growth and stability, or controlling labor costs. Whatever those key factors are for your organization, I want you to think about them now.
Okay, now that you have your elevator speech items, imagine that as I walk off the elevator, I say to you, “Do your financial statements present the data necessary to evaluate how you are doing relative to these key factors?”
Whoa, wait a minute! I thought financial statements were prepared to determine how much money I have and how much money I made. Are we talking about the same thing here?
Yes, we certainly are. Remember that your financial statements are just that—yours! While you obviously have to follow some regulatory standards governing how you prepare and present your financial statements, many organizations overlook the fact that they do have a lot of flexibility in what financial data they present in their financial statements.
Given that, wouldn’t it just make sense if your financial statements gave you the data necessary to evaluate the truly important aspects of what makes your organization successful?
For example, if one of your key performance measures is controlling labor costs, you could have some specific schedules expanding your payroll line item that present more in-depth measures related to productive labor and labor variances.
Or maybe you focus on liquidity. In that case, I would expect that your current ratio would be displayed in the financial statements so you don’t have to calculate it or hunt for the historical data in order to evaluate whether the ratio has changed dramatically from prior years.
The examples are endless: sustainability, EBITA, cash flow from operations, EPS, market share, quality, etc. Whatever financial measures you deem to be crucial in evaluating your organization’s success, remember that your financial reporting should help your organization, not hinder it.
Whatever components you decide are vital to your organization’s success, you need to find a way to measure them and to begin to place much more emphasis on them. In addition, they shouldn’t be hidden from others within the organization. Transparency is critical to an organization’s success, and if you are relying on certain groups to improve these numbers, it only makes sense that you share these numbers with those individuals.
Think about it from their perspective. It is the equivalent of bowling through a curtain. You roll your ball down the lane, it disappears through a curtain and then hits some pins. How motivated are you to work on your form if you have no idea what the results of your efforts are? In addition, what information are you gathering to determine their success? Are you tracking ball speed, revolutions, positioning of the ball relative to the lane? Or are you even keeping score for the right lane?
If you haven’t done so already, maybe this is an opportunity for you to step back and determine what goals you need to accomplish in order for your organization to be successful. Remember that goals should be “SMART.” The “M” in “SMART” stands for “measurable.” Once you determine the best method for measuring those goals, you should make sure your financial reporting system is generating the reports necessary to evaluate those goals on an accurate and timely basis.