Business intelligence will never exist until you develop the ability to convert the transaction data your business creates into information you can develop insights from to make decisions. Fail to convert data to information robs you of the ability to know if your business is on track to make money before it’s too late.
Without a business intelligence system, you are much more likely to spend more in COGS, SG&A, and other expenses than you planned for or ever intended. If you want to spend less to make more money, the first thing you need to do is to put in place a process for ensuring your weekly business transactions are accurately recorded. Do this, and you can start using your financial statements to make better decisions.
Overview
Business intelligence is how you know if your business is on track to make money before it’s too late. An essential component to doing this is in leading and lagging metrics measurement that confirms the quality of your results. Without a business intelligence system, you are much more likely to spend more in COGS, SG&A, and other expenses than you planned for or ever intended.
As you confirm the quality of your actions through weekly KPIs (key performance indicators) and the quality of your results through KRIs (key results indicators) and monthly variance reports, you’ll establish where your business is on track. You’ll also identify where you are not tracking to meet your profit plan goal. Note that profit plan goals can, and do, overlap with your strategic goals whether or not you have a strategic plan mapped out.
Unfortunately, every financial statement is a lagging, not a leading indicator of results. Fortunately, each accurate financial statement does readily inform on the quality of the decisions you have already made and the actions you have already taken.
Your business intelligence system (BIS) is how you get your leading and lagging metrics working in tandem to track the progress of your activities, start to finish, through to the final results. Think of it as a simple equation where “actions = results.”
To make the equation work, start with the results you want represented by your key lagging indicators. Then work backward to identify the necessary actions, the leading indicators you will need to act on to realize your planned results.
Leading indicators are often related to activities undertaken by employees with lagging results, telling you the profitability of those activities. Failure to monitor the appropriate actions and activities on a daily and weekly basis rob you of the opportunity of taking a more informed path to make more money.
Highly profitable businesses use their BIS to confirm how they are doing through the year by identifying where it is performing better and worse than planned, utilizing the following tools:
KPI Scorecard: Comprises your leading metrics or key performance indicators (KPIs), which should be captured and discussed in your weekly management team meetings. Using a KPI Scorecard helps you confirm that your daily actions are on track to produce your planned weekly, monthly, and annual results.
Financial Statements: Are your financial summary reports on the results of business operations. The P&L Statement shows how the net income of your business is determined. The Balance sheet shows your assets, liabilities, and net worth on a stated date. The Statement of Cash Flows shows the sources of cash utilized by your business activities during a stated period. Each financial statement shows how the funds entrusted to management by the owners’ and lenders led to the current financial position.
Variance Reports: Are pulled from your monthly P&L statement and balance sheet. They should be used during the second management meeting of each month to confirm whether or not you realized your planned results for that month.
The information from these management reports comes from data being generated and recorded through every transaction. If you capture this data accurately and on a timely basis, you will be able to convert it to information to identify the needed actions you must take to position your business to make more money.