Key Performance Indicators Must Mean Something

Jul 10, 2015

I’m currently working with the CFO of one of my more recent clients to try to develop a dashboard with key performance indicators for the owners use. This owner has a rapidly expanding business that is very profitable but she is relatively inexperienced with the accounting process and accounting terminology.

Accordingly, a lot of what the CFO and I do is to present information to the owner in a fashion that makes sense to the owner without using a lot of technical accounting jargon.

When we began the process of developing a dashboard for this owner, we prepared a list of the subjects that we thought would be of interest to the owner. Those subjects included sales, staffing, cash collections and cash payments. We also decided that the most important question we can ask the owner is what questions are left unanswered in your mind at the end of the month after you review the reports that the CFO and the outside cost consultant have prepared for your review.

The results of my meeting with the owner were surprising to me, mostly because of the direction that the owner wants to head in related to preparing the dashboard. The owner did agree that most of the subjects that we came up with as likely to be of interest to her did in fact make her list as to those items that she wanted to see. However, she had significant changes from what I thought might be the traditional accounting approach.

On the sales category, she of course wanted to see sales history, but she was also far more interested in future sales already booked and what is necessary to sell in the future to be sure the company makes her annual sales goals. Part of the dashboard has to be historically how has the company done for the current month and year-to-date reaching its sales goals, but then a forward-looking component as well. This future looking would need to addresses what sales have to be added by month beginning with the next most recent month and going through to the end of the year to maintain the originally intended sales goal. This will require some more work on the part of the CFO to classify sales both currently and in the future so that that portion of the dashboard will be meaningful to the CEO.

Also important to the CEO is the staffing levels required to meet those sales goals. Currently this business does not have a staffing model in place to anticipate capacity available and compare that to sales required to meet monthly and annual goals. This company is rapidly growing and is in the service industry so that individual professional talent is fundamental to meeting service requirements as well as maintaining the highest level of technical expertise and quality required in this business. The CFO had been working on a staffing model to help provide this information but now will have to focus more attention on that model because the CEO cannot possibly meet sales goals if the company is not correctly staffed to take on additional capacity as it is booked.

Quite surprising to me was the CEOs significant disinterest in cash receipts. In this business, her services are in such demand she’s schedules her sales arrangements so that payments will be in advance of services provided. So bills set out and cash received for July 1st are in effect to pay for July services. As a result, if payments are not timely received, services are withheld and no progress is made on the customers project. The end result of this level of sales structuring is that there is no significant shortfall in cash receipts. The activity level on cash inflow of course needs to be monitored which is the CFOs job but it does not rise to the level of immediate concern to the CEO.

The last item that she was interested in is cash disbursements. She of course recognizes that there are two components to available cash when and in what amount are receipts received and when and what amount is cash dispersed. We have put in place a budget for 2015 on cash disbursements and although it is not a zero-based budget or one in high detail for that matter, it will provide a reasonable tool to benchmark cash outlays on a go forward basis. The CFOs intention is to build that into the cash disbursements model for the dashboard and further analyze cash disbursements in future years so that that component of the dashboard will even be more detailed than it is today.

We believe the suggested changes above will more than meet the CEOs request for relevant data to the management of the company and provide actionable data which will allow her to manage this company and maintain the growth she has experienced thus far. It is important that we tailor this dashboard to the needs we know the CEO has, but also to encourage her to analyze additional information that we know is critical to her success.

Categories: Cost Accounting