In today’s complex business environment, developing a consistent approach to measuring and improving financial performance can be challenging. However, by ensuring measures are in place and in line with the business’ strategy, it can help enhance financial standing which is now more important than ever. Without sufficient transparency, important strategic decisions and respective measures are basically not possible. As they say, “you can only manage what you can measure!”
Building a set of ‘strategic measurements’ that are aligned to a clear set of relevant key performance indicators (KPIs), linked to financial statements is crucial, giving clarity and focus to how each impacts the bottom line and where tactical improvements can be made.
Below are four key factors you as a business owner should think about when reviewing financial performance in a strategic context.
Enhancing key performance indicators (KPIs)
It is increasingly important to implement a change management culture that complements high level financial statements and in-depth analysis on different client segments, products, or services – as well as the regions and countries where the business is located.
Building up a more granular picture of profit margins helps to pinpoint which clients, products, services, and locations are most profitable or areas that have a negative impact on the bottom line. This ‘profitability cube’ shall be transparent and clear from all of these important dimensions.
Transitioning to a more pragmatic set of performance indicators allows you to allocate financial budgets more accurately and provides a clearer idea of the key drivers to achieve long term financial objectives along with your strategic targets.
Address the bigger picture
Looking at the bigger picture helps to identify opportunities that can boost overall financial performance, sustainably.
Ask yourself what expertise and processes would help improve your ability to satisfy client demands and their concrete needs while targeting your products and services more effectively. For example, allocating sufficient finances to mega-trends such as digitisation (workflows, robotics) and a more euphoric user experience (UX) could be a more successful route to improving financial performance in the long term than, say, focusing on a short-term sales strategy in a country that may no longer be a growth market.
Equally, assess outsourcing functions that are of low strategic value for your business model, or where you lack in-house expertise. Outsourcing will not only help to improve operational efficiency but also allows more time to focus on improving strategic market positioning. A strict service level management for respective functions reduces potential risks, drastically.
Align risk management and compliance
A good and comprehensive risk management strategy can help identify and protect a business against the risks of non-compliance on local and global tax, regulatory, corporate social responsibility, and environmental issues – there are more than just financial or liquidity risks to drive your business. However, it is only by identifying and attributing the level of risk attached to each element that you can build a true picture of their risk management strategy and assess what is compliant, and what is not, in order to take appropriate action.
Again: you can only manage what you measure
Having a financial system in place that regularly manages, monitors, and measures actions and KPIs will add transparency to your business model and more accurately highlight financial performance indicators. Developing processes and employing technology that facilitates better analysis of financial performance is increasingly important.
Working with trusted partners can help create a culture where business owners, managers, and employees fully understand performance drivers and receive the necessary support to provide a better connection with business goals. Such a culture should also extend to aligning incentives schemes with financial performance in a way that is both fair and transparent.
By improving financial performance strategies, businesses can create a roadmap that not only links business goals more closely with financial performance measures but also creates the much-needed momentum to drive it forward. Businesses that do this now will be in a strategic position once post-pandemic economic recovery begins.
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