Tracking Your Company's Vital Signs
by the Emerging Business Group at PricewaterhouseCoopers
Corporate Partner of the UMass Amherst Family Business Center
CEO's of one-third of America's fastest growing companies acknowledge they are personally spending too little time monitoring their company's key operating information. This key finding of a recent Coopers and Lybrand "Trendsetter Barometer" survey underscores one of the dangers of life in the fast lane: losing control.
"It's important," says David Grand, an Entrepreneurial Advisory Services partner with Coopers and Lybrand in Albany, NY, "to identify the three or four key indicators that are most important for monitoring your business, and to review them often, if possible, every day. If you've always been using the same indicators, or if your business has become a more complex operation over the past few years, it's time to review them with your accountant or another trusted business advisor. Early detection and quick reponse to a problem are critical for the success of a business," he adds.
"If you haven't changes the key measures you use to track your business in the last 24 months, chances are that a few are no longer relevant," cautions Don Dailey, partner in charge of Coopers and Lybrand's Entrepreneurial Advisory Services(EAS) practice in the Michigan/ Ohio region. Daily recommends at least an annual reassessment of the vital signs you monitor to ensure that the decisions you make are based on information that is in sync with the marketplace.
"For example," Dailey explains, "the Trendsetter' results showed that 86 percent of fast-growth CEOs look at their direct expenses daily or weekly, typically for raw materials and labor. But, in many industries, competition and technology are driving an amount of labor out of the product. This makes measures that are labor-based less and less relevant. The logistics, engineering, marketing or distribution costs could be much more significant to a business in this circumstance." Daily notes, "Keeping track of your business' vital signs today has become a matter of geography - where on the operating statement you focus your attention."
The importance of monitoring some areas, however, may never change. Dailey encourages businesses to focus consistantly on basic working capital management.
"Finding better ways to control accounts receivable, inventory and accounts payable," he explains, "can help you tap a reservoir of cash flow that is easier to access and less costly than some of the lending instruments that have been developed. When you borrow from the banks, you pay interest. But when you do a better job at collection of receivables or you minimize your investment in inventory, it doesn't cost you anything if you are redirecting employee efforts. The techniques and opportunities of working capital management are simple enough that every company of every size can benefit."
Dailey recalls what happened when he showed a client, a fast-growth manufacturer of household appliances, that its turns in inventory and days outstanding in receivables were substantailly higher than its competitors'.
"The company, ow a $200 million-plus business, undertook a very aggresive program of working capital management." says Dailey, "Over a hree-year period, the company squeezed out over $75 million in working capital investments, largely driven out of receivables, inventory and payables. Over $45 million of that savings was produced in the first year," he notes, "when the compnay instituted better collection techniques and most importantly, made significant strides in inventory management. For example, the company used vendor partnering and better customer communications to reduce both their finished goods stock and also the incoming raw materials stock."
In addition, more and more companies are measuring their progress, or setting their goals, aainst the achievements of their peers.
"One of the trends we're seeing," observes Grand, "is that companies are more focused on benchmarking, or comparing their activities to those of others within their industry. We receive numerous requests from clients to provide data on their industries, particularly in such areas as inventory turns, accounts receivable, days of sales outstanding and comparative data on employee compensation, particularly incentive plans."
Unlike humans, companies can develop new vital signs. Not long ago, statistics such as 'hits on a web site' meant more to spiders than to Internet business users.
"Businesses that have put up web sites on the Internet are looking at statistics on how many 'hits' they get on their site," says Grand, "and trying to determine the relationship to sales. Just like any marketing tool," he adds, "results often have to be looked at on a long-term trending basis."
Ideally, the tracking of your company's vital signs not only monitors its health, but will point to opportunities for increased fitness.
