In business, we are always looking for feedback on where we are and how we are doing in order to plan our next steps in where we are going. All too often I see entrepreneurs pouring over financial statements hoping that they will predict the future. I think there are many challenges in using traditional financial statements to help in the operations and vision for your business.
Backward Facing: Financial statements are backward looking documents. They tell you were you have been and provide no insight into where you are going. Due to the practical reality of creating financial statements, they are rarely available until the third week of the month after the month you are reporting numbers for. This is far too late to provide any meaningful information for the current month’s activities. How current do you need your numbers to be to have a meaningful impact on your business today, tomorrow, and this week?
Strategy: Financial statements are organized according to the Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). These rules are designed to create consistent financial reporting across businesses and industries. This is important for investors and other key stakeholders for providing standardized ways of recording, reporting, and measuring on businesses. For senior management, these reporting standards do not align with a company’s strategy. What numbers show whether your strategy is on track?
Feedback: Financial numbers rarely provide the feedback to everyone in the organization that they need to know whether they are on track or not. In many organizations, financial statements are never shared with the majority of employees. As I wrote in Red, Orange, or Green, high performing organizations find those two or three critical numbers that tell them every day whether they are on track or not. Have you found your critical numbers and do you report them daily to your entire organization?
Deciding whether you are going in the right direction is a challenge. Rather than using your financial numbers, find the operational ones that drive your business.
