Ideas

Seeing Beyond Financials…

In a world of skyrocketing information, navigational tools help us better manage complex activities, like running companies. They do so by transforming data into actionable performance insights that make a difference.

Familiar tool, but…

Established reporting requirements make financial statements the default scorecard. Interestingly, standard financials provide limited insight into how companies are actually run, and, importantly, even less on how to add value.

“GAAP financials can identify needing to increase sales or decrease costs, but not how to.”

Enhancing financial information to include trends or ratios helps provide additional insight into performance trends. Table 1 displays P&L data, modified for illustrative purpose, of a profitable but challenged company over time. We can immediately grasp the challenge: Plateauing revenue growth plus rising costs reduces returns. Clearly, this is helpful. Yet, even this data set offers limited insight as to why the important trends occurred in the first place and then over time. No financial ratio can explain this. Seeing-Beyond-Financials-Table1 “Whys” are tricky to untangle. Trends, like Sales Growth, are multi-determined, resulting from various market changes and organization inputs. Internal and controllable ones to consider include value proposition, sales practices, market strategy, marketing efforts, or customer engagement strategies. All likely contribute to top-line results. But which one(s) is the optimizer?

Extending the analysis…

To answer the optimizer question, you need a scorecard that captures insider opinion or perspective on “real-time” business practices. Figure 1 shows non-financial data using our SnapshotTM value-driver diagnostic. The survey tool reveals how companies operate, based on leadership team ratings (1 is low; 5 is high) of value driver practices. The results here profile a profitable, owner-described growth company. SeeingBeyondFinancialsFigure1 Description aside, the key initial takeaway is a strategic question, “Is this company ready and in a position to grow?” Take a close look at the pattern. Three of the four highest rated drivers: People, Operations, Culture, relate to internal infrastructure. Customer is also rated highly due to excellent responsiveness practices rather than applying analytics to understand market segments or account profitability.

The four lowest drivers: Growth Engine, Market, Innovation, and Strategy relate to strategic and sustainable practices. These drivers and supporting practices are less established in this case. Yet, they’re the hallmark of growth companies and involve aggressive market involvement, so vital to sustaining performance and value.

“How does non-financial scorecard data help business owners and leadership teams?”

Figure 1’s high-level view gave this leadership team an opportunity to “reality test” their respective views of the company: Starting with dialogue on whether or not growth is even on the agenda. Knowledge of where different perceptions converge and diverge, especially on strategic matters, allows leadership teams to clarify company direction and tighten their alignment, both precursors to effective planning and execution.

Previously “hidden” practice information also encourages actionable insights on performance trends. For example, the sales plateau from Table 1 was readily explained by low team ratings on the following survey items:

  • Direct sales efforts to expand core markets,
  • Explore adjacent markets for additional revenue opportunities, and
  • Product or service pricing yields healthy gross margins

Ensuing strategic work on market strategy and sales practices enabled this company to successfully redouble its push into core markets, this time with a compelling value proposition and more favorable pricing.

What’s in your wallet…

Data is a form of currency. Like money, value is derived exclusively by utility. One hundred dollars brings more value than ten dollars.The same applies to business scorecards: More insight and actionable data is better than less. Value-driver diagnostics complement GAAP data tools by closing the data-to-action gap… Seeing-Beyond-Financials-Figure2 Data on actual business practices quickly shed light on performance trends. This helps leadership teams elevate their strategic dialogue and effectively respond to what’s happening in and around their companies. And that value-add is the basis for setting direction, executing in-game adjustments, and better performance.

Contact us to discuss adding data to your wallet.