W.Edwards Deming said “Managing a company by looking at financial data is the equivalent of driving a car by looking in the rear-view mirror.”
Financial data is basically ‘historical data’.
The Profit and Loss Statement is for the prior month or prior year and the Balance Sheet is a snap shot of the business at a specific date in the past (even if recent).
How useful it is to predict trends depends on both how old and how accurate the data is. You will also need something to compare it to, prior months or years and competitor or industry data.
In the past, when change was not the ‘unchangeable’ factor, when business cycles, technological advances and customer trends were months or years, financial data was a solid basis to build upon.
Now cycles and trends may only last weeks and the only certainty companies have is that they either innovate or die.
To manage a company you need to look to the future, predict the trends and position the business accordingly.
So what data is important for looking ahead?
Things like the number of customer calls salesmen are making can indicate future sales if you monitor the average conversion rates and the average order value.
The number of calls and conversion rate is information that should come from the sales department but the average order value for most businesses is the same as the average invoice value, which should come from the accounting department.
Your future cash balance depends on your recent sales and the average time it takes to collect from customers, less amounts that have to be paid. All of this data should be available in real time in the accounting department.
Of course a good understanding of the business and of finance is important to make the necessary calculations and analyse trends.
Financial data will show you where you are and where you will be soon, but you need to know your customers and your market well, so that you can predict the changes and use all these data to stay ahead of your competition.
Stop looking in the mirror and use your financial data to look ahead.
