We attribute, at least in part, the tendency to make decisions on an ad-hoc basis to the general lack of good management information. If the numbers are not at your disposal, be they financial or non-financial, then you have little choice but to make decisions based on instinct.
Contributing to this issue is the unreliability of monthly management information, attributed to managers disregarding early warning signs of problems in profitability and liquidity.
Management is moving from an art to a science. With the ongoing computerisation of all business systems, more information is becoming available to managers on which to make decisions.
If you have the facts, most business decisions become logical. For example, if you know that advertising in one particular medium provides a 20% response rate and you convert 50% of these, as against another that generates a 5% response rate with a 50% conversion, the rational decision is to invest more in the advertising area that provides the greater return. The basis of decisions moves from instinct to logic if (and it is a big ‘if’) the right information is available.
What are the consequences of inadequate management information?
The lack of reliable and timely management information can create many problems for entrepreneurs and owner mangers.
You can’t manage what you can’t measure.
Just look at the statistics available during a football match. The analysis about so many different aspects of the game other than just the scoreboard allows the coaching staff to adjust their game plan as the game progresses.
The consequences of not having reliable management information are clear – the business will not perform to its potential, because the right decisions are not being made.
Privately owned businesses that underperform have a significant impact on the financial well-being of the owners and, perhaps even more importantly, will create a level of stress that lowers the return for effort to an unacceptable level.
What are the warning signs?
You know how it feels to need vital information but not have it to hand.
What may not be so obvious is whether you have information about the right things or whether the information itself is accurate.
A key part of the business planning process is to identify the business drivers, or those factors that drive your revenue and your major costs.
It is critical that your management reporting system measures such drivers. Being in a situation where the business drivers are not known or measured could be your warning sign. Another warning sign to note is major fluctuations between monthly results. This might indicate unreliable information and if that is the case, the warning bells should be sounding.
What should you do?
Work with good business advisers, like RSM Tenon to glean a proper understanding of your business drivers.
Work together to develop a meaningful business plan and forecast that you can measure against.
Above all else make sure that you are measuring accurately and frequently the mission critical elements of your business.