by Rich Bond
“Belling the Cat” (often incorrectly attributed to Aesop) tells of a group of mice who are stalked and tormented by a cat. They decide they need an early warning system that will alert them to the presence of the stealthy cat. That way, they can know when the coast is clear to leave their hole and go out to grab some food. A young mouse proposes putting a bell on the cat. But no one mouse is brave (or fool hearty) enough to volunteer to do it. Moral: It’s one thing to know what to do, but it’s another thing to actually undertake the task.
Have you ever felt like the mice when financial problems caught your business off guard and ate cash or ruined your plans? Business owners often wonder how to “bell the financial cat” or to find someone with the experience and expertise to do it for them. They need a way to limit unforeseen setbacks via a Financial Alert System.
Even high performing companies will encounter difficulties. However, you can limit the damage – or even avoid it – by being able to read early warnings and taking appropriate corrective action. Financially sophisticated companies produce monthly statistics called Key Performance Indicators (KPIs).
A financial expert (Controller or CFO) with the right background can identify the right KPIs to follow and report to the management team. He or she can “bell the cat.”
KPls are generally four or five industry metrics that enable you to measure current performance vs. expectations or quantified goals. They are particularly useful when analyzed over time, as they can reveal trends that provide an early warning about developing, or even chronic, problems. KPIs allow management to take action to prevent profit shortfalls. One of the most widely used KPIs is Gross Margin. A lower than planned gross margin can reduce profits by 10% or more. If a company catches this problem early, corrective action can be taken with price increases or by working with sales and marketing to improve the product mix and emphasize more profitable items. Some of the most valuable KPIs are business- or industry-specific. For example, in businesses where there is a lag between receiving an order and delivering or installing the product, a good measure of performance would be either orders or order backlog.
Here’s a case history:
A company, which had significant production lead-times, was enjoying record quarterly sales and profits. Yet, the management decided to delay a major capital investment because they were watching their KPIs that had been developed by their Controller. They were alerted to the fact that their order backlog had declined for three consecutive months. That led them to institute saving measures. Within three months, sales for this company and its competitors had fallen by over 25%. This company weathered the industry downturn better than its competitors, preserved a solid level of profitability, and had fewer layoffs because their early warning enabled them to take action before sales declined.
Full disclosure: I placed the Controller who installed the KPIs at this company and saved the company from a financial mistake.
Have you had a similar experience? I’d love to hear about it. Or if you want to discuss how KPIs can help your business, give me a call at 203-221-3233 or email me at email@example.com. Together, we can find the right professional to monitor your financial situation and put a bell on the financial cats that may be stalking you.