Why Measuring Business Performance is More Critical Than Ever
By Richard Snyder, CPA, CGMA
The impact of COVID-19 has been felt by companies for more than nine months now, and another wave of the virus is currently hitting the United States. It is anticipated that even more restrictions on individuals and businesses will be forthcoming in the next couple of weeks in order to try to reduce the record level of cases impacting our country.
Businesses adapted after the initial surge in COVID-19 in the spring, finding ways to continue operations and keep employees working.
What has become apparent throughout 2020, is that it is more important than ever to be able to measure your business’s performance. Having a good financial reporting system, providing timely and reliable financial information to owners and stakeholders, and being able to document and explain changes to your financial results is critical to a company’s current and future success.
Businesses can reassess the following two areas to improve their financial reporting process and measure performance:
- Documenting results. Most, if not all, businesses have some type of financial reporting system which can provide monthly results. However, many companies do not explicitly document changes in their business from month-to-month or even year-to-year. It is important to create a written narrative explaining why your financial results have changed. For instance, what was the impact of COVID-19 to revenue, expenses, and margins, and were there other extenuating circumstances affecting the results? Documenting key changes to customer relationships, sales, and margins can provide valuable information to management not only in the present but the future as well. Creating this trail is important for owners, management, and external users of the financial statements and it will allow the company to better tell its story.
- Metrics. Using metrics to measure business performance can be a valuable tool. Metrics should be strategic and meaningful in order to add value to the business. Moreover, they should be understandable and measureable to ensure there is a clear purpose and that any ambiguity as to how the metric is being utilized is eliminated. Finally, results need to be timely to allow for effective management assessment and actionable items to be developed and acted upon.
Business environments are not static. They are constantly changing, and businesses need to be able to adapt and change quickly. In order for this to occur, management and owners need accurate and timely information. One of the benefits of good, timely financial reporting and measurement is that it allows management and owners to assess financial information and key metrics, and focus its efforts on continuously improving the business. When management has the information needed to dig deeper into revenue or margin changes, the impact of expense reductions or increases, and other one-time or nonrecurring income/expense items that impact the financial statements, they will be in a better position to make key, impactful decisions and better lead the business.