Regularly monitoring and analyzing your business’s financial performance is crucial for identifying areas of improvement, ensuring profitability, and preventing potential financial issues.
Primary Implication
The only way to know if you and your employees are producing better results is to monitor them to see if they are better or worse than expected. Every business starts with cash, which is invested in numerous ways to generate revenue. Ultimately, the revenue is turned back into cash, and the cycle begins anew.
Those who choose to monitor their business results use the insights they gain to manage their business to higher profits. Those who choose not to monitor their results are the same business owners who are constantly scrambling to find the cash to pay their bills because they aren’t recognizing where their business results are telling them that a problem exists, so it goes unfixed.
Overview
Anytime you fail to do BusinessCPR Step 3—Confirm the Quality of Your Profits, you have no line of sight to what is and isn’t working as planned. Your profit plan is only as good as the quality of the actual profits being produced each month.
Similar to the importance of consistently monitoring your pulse and blood pressure in your quest for heart health, failure to track your profit quality prevents you from recognizing what you need to start, change, or stop before your business suffers full-blown cardiac arrest. Below are some of the consequences to your business that result from not confirming your profit quality every month:
- Lack of timely financial reporting means you never know if you are winning or losing in your game of business.
- COGS and SG&A expenses are growing faster than sales because there is no budget to manage them and no variance report to monitor their trends.
- The business owner is likely working harder today than ever before while paying themselves less because cash quality (profits) is not being produced.
- Employees are increasingly frustrated because management is more worried about finding cash than their well-being or productivity.
- Odds are near 100 percent that failing to use financial reporting to confirm the quality of your profits means you won’t have control of your cash (Step 1) or a well-developed profit plan (Step 2) to manage your business.
The frequency of monitoring the results of your actions is proportionate to how quickly your results change. For example, if you have new sales problems, you will want to monitor daily sales activity. Do this to make sure that daily sales activity actions are happening. The failure to monitor daily sales activity means you leave planned new sales for the month to chance.
For most businesses, weekly monitoring of key performance indicators for sales, operations, and finance activities is sufficient. You only adopt daily monitoring when day-to-day performance variability is inconsistent and unpredictable. This usually involves problem employees not doing their job. If your employees know what’s expected of them and take pride in their work, you monitor your KPIs to keep a pulse on what your likely results for the month are going to be.
The review of your financial statements should be done monthly. Here, you are confirming how your business performed relative to the plan. Use the thirteen-month rolling variance report for businesses with significant month-to-month swings in sales to help gauge where the business is doing well and where it needs to improve. If year-over-year results are relatively consistent, then a year-over-year results review is also a quick way to gauge where your business is performing better and worse.
You monitor the results of your business so that you can do better tomorrow than you did yesterday. Those who choose not to look at the results of the actions occurring across their business are hoping that things will improve, and hope is not a method.