Steven Mugglestone

The more I learn, the less I know

Gut Instinct Does Not Replace Good Management Information, Just Ask the England Cricket Team:

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Gut Instinct Does Not Really Replace Good Management Information

I have seen it on numerous occasions, when appointed as a part time finance director.  The owner knows their business inside out, or so they say and believe.  The classic statement, “I know my business income and costs, a third direct costs, a third overhead and a third contribution to financing.”  So after a brief review of the actual information put together, which has never been done, my reply has been, “So what’s the other third then?!”.  “Oh.” is usually the reply.

How to ensure rock solid business decisions

The above situation is more common than you think and, at least in part, the tendency to make decisions on an ad-hoc basis is down to the general lack of good management information. If the numbers are not at your disposal, and that is financial and non-financial, then many businesses have little choice but to make decisions based on gut instinct.

Contributing to this issue is the unreliability of monthly management information, attributed to managers disregarding early warning signs of problems in profitability and liquidity.   In larger organisations with a number of senior management including sales and operational management, a classic technique in order to duck and avoid their own shortfalls and potential failings is to “dis” the management information, picking on the commas, the brackets and the spelling as evidence that it cannot be relied upon.  Nero and Rome aflame comes to mind.

Management is certainly moving from an art to a science. With the on-going computerisation of all business systems, moving on to cloud based systems allowing access and use on the go and more information becoming available to managers on which to make decisions.

With facts at hand, most business decisions become logical. For example, if you know that advertising in using email provides a 15% response rate and you convert 50% of these, as against another that generates a 5% response rate with a 50% conversion, the rational decision is to invest more in the advertising area that provides the greater return. The basis of decisions moves from gut instinct to evidenced based logic if the right reliable information is available.

What if you have poor management information?

The lack of reliable and timely management information can create many problems for entrepreneurs and owner mangers. All management training and business planning relies on being able to measure things to be able to manage.

One of the key reasons why the England Cricket have become the world’s number one test team is that they have an advanced system of information advising of how opponents react to certain styles of play and where balls need to be pitched.  This is based on reliable data from actual statistics.  And do you know what, ….. it works!

The consequences of not having reliable management information are clear – the business will not perform to its potential, because the right decisions are not being made.   The importance of Key Performance Indicators (KPIs) is vital for this success and the England Cricket team are a classic example of this.

Privately owned businesses that underperform have a significant impact on the financial well-being of the owners and, perhaps even more importantly, will create a level of stress that lowers the return for effort to an unacceptable level.

What can you see happening?

Everyone, at some stage, knows how it feels to need vital information but not have it to hand.   What may not be so obvious is whether you have information about the right things or whether the information itself is accurate.

A key part of the business planning process is to identify the business drivers, the KPIs, or those factors that drive your revenue and your major costs. KPIs can be seen as numbers but are not necessarily at all financial.  Examples include numbers of calls per hour, numbers of bums on seats, footfall, downtime, spend per head, machine hours, the weather and temperature, benchmarking against other businesses etc, etc.

It is crucial that your management reporting system measures such drivers. Being in a situation where the business drivers are not known or measured can be your warning sign. Another warning sign to note is major fluctuations between monthly results. This might indicate unreliable information and if that is the case, the warning bells should be sounding.   One example of fluctuations was order numbers, with a business having two good months and one poor.  On further review, the director responsible for sale, updated the sales brochure every three months, so was not out selling.  Easily fixed, but not discovered until the information was made public.

Interested in the issues?

Work with good business advisers, ones like McGregors Corporate, that include partners who have actually been Finance Directors and have been responsible for these improvements first hand.  Work with us and we both can obtain a proper understanding of your business issues, drivers and KPIs.

After that we can work with you to develop a meaningful business plan (which can be very simple) and forecast that you can measure against.   Being able to measure accurately and frequently the mission critical elements of your business will be the start of key improvement to your business, its profits and its cash.  Which business person does not want to see that happen?

Steven Mugglestone BA FCA,
Finance Director Services
McGregors Corporate, Entrepreneurial Chartered Accountants and Business Advisers
…….Really good for your business

McGregors Corporate are a Member of Probiz Tax, providing Innovative Tax Solutions to Owner Managed Businesses.

http://uk.linkedin.com/in/stevenmugglestonefca/
http://twitter.com/McGsCorporate
http://www.youtube.com/watch?v=nhC0wlglePE
http://www.mcgregorscorporate.co.uk/

T: 0845 519 5659                T: 0121 236 3317
steven@mcgregorsbirmingham.co.uk

Connect, call, talk, email, contact us, send a messenger pigeon and arrange a discussion, review and free meeting.

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