Rick Norris
JD, CPA
Business Management and Consulting
Measuring Business Health
Forensic Accounting & Fraud detection
Measuring Your Business' Health
Integrated Scorecard Engineering
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Measuring Your Business's Health
Last year when I was acting as general contractor in building a second story on our home, one of the issues I had to resolve was the height of the structure. I hired an engineer to survey the roof height. This survey predicted that the roof was going to be a couple of inches too high once the final tile was in place. (I was initially cautioned by the engineer, at the outset of the project, that there was no room for error in regard to the height restriction.)
The carpenters that I hired worked diligently and professionally with every board they put in place. They exercised professionalism in their blocking and strapping to create a strong structure. But unlike the engineer, they could not see the big picture with respect to the height. So, I had to make decisions in order to conform to the building code.
This scenario is analogous to business. Even in small entities, business owners or corporate officers are so in tuned to producing a competing service or product that they lose sight of whether they should produce it, and how much? Or, are they benefiting from marketing to a specific segment? Many businesses find themselves in financial trouble causing them to borrow money, lay off workers, or even close the doors.
The good news is you don’t have to be an MBA to understand the warning signs before a crises situation. With a little guidance, you can decode the information that is lurking between the lines of your “indecipherable” financial statements, and utilize this information to implement some of the planning that major corporations perform.
The first step is setting goals. Just like in building my house, I had many goals to reach in order to have my family move in before Christmas. One of these goals was to build the house under a certain height. It was measurable and verifiable, and I had set a course of action to meet that goal. In business terms, this goal-setting is also called the “strategic plan.” And a companion in this first step is the plan (or course) designed to meeting this goal. This process is called the “operating plan.”
In my example, the steps that I would have to take to alter my roofing material at the very top of the roof, instead of tile, to keep the roof under the maximum height. And that is, the responsibilities of the carpenters, roofer, and sheet metal person. This was my “operating plan” to meeting my goal of an acceptable roof.
The second step in getting a handle on your business is an obvious one. In regards to my house, I had a survey engineer in place to verify the height well-before the final roof was to be installed. If I were to wait until after the roofing tile was installed, a negative report on the height would have been disastrous. Likewise in a business, you must have current, accurate financial information.
There have been incredible gains in accounting software since I began in public accounting 27 years ago. With this software, not only is it easy to enter data, but basic financial information is usually only a couple of clicks away. As an executive from Lowermybills.com mentioned at a dinner engagement a couple of weeks ago, “We do not embark in a particular marketing direction unless we can measure its results.” In other words, “If you can’t measure it, you can’t manage it.”
In business, we refer to these measuring items as “Scorecards.” A Scorecard is a visual dev ice, usually on a computer screen, that measures the “vitals” of your business against your strategic plan. Just like the doctor’s chart after your physical examination, a Scorecard is a screenshot of your business health. Just like a doctor sees your blood pressure, cholesterol and blood attributes, a scorecard can measure many aspects of your business’ health. For example:
Basic Financial Scorecard:
A basic financial scorecard can measure your business’s historical health:
Gross profit percentage (Revenue less Cost of Sales)
Accounts Receivable Days (Days it takes to collect accounts receivable)
Debt/Equity Ratio (Funds borrowed compared to Funds Invested)
In such ways, this type of scorecard will tell you how much profit you are making before your operating expenses; how efficient your collection process is; and how much money are you borrowing compared to your business investment. But is it enough?
While it does help with many decisions, it only measures the immediate financial performance of you business. Even if we were to do all the available financial measures of your business, you would still be lacking other perspectives. In other words, these financial measures do not show you other important perspectives that involve customers, your internal business processes and your employees learning and growth.
In addition, you are not measuring all of these perspectives in light of your strategic goals. It would be like my carpenters using a T-square, plumb-ball, and level to build our house, but not using tools that are available to measure the height and overall plan. They would be building a great house, but to what end? If the roof was too high, it would have to be torn down.
Balanced Scorecard
This use of these different perspectives in light of a company’s strategic plan is called the “balanced scorecard.” Many businesses from “ma-pa shops” to large corporations utilize a balanced scorecard. The balanced scorecard is a management system introduced back in 1990 in a Harvard Business Review article, “Using the Balanced Scorecard as a Strategic Management System”, by Robert S. Kaplan and David P. Norton.
This system is everything I mentioned above, with a lot more. It is like comparing a square drawn on a piece of paper to a cube. Both have sides, but the cube has an additional dimension.
The Balanced Scorecard looks at opposing perspectives to give a “balanced perspective” to a company in view of their strategic plan. For example: This scorecard will look at a view comparing long-term vs. short-term planning.
In the financial perspective, it would compare revenue growth vs. revenue mix. In the customer perspective, it would compare customer retention vs. a satisfaction survey. Likewise, in the internal perspective, it would compare new product revenue vs. product development cycle. And finally, in the learning perspective, the balanced scorecard would compare revenue per employee vs. strategic information available to employees.
These are examples of the balanced perspectives that provide an informed vision of a business’ health. The amazing thing is that this technology is available to business at any size. Whether, you use an EXCEL model, or a sophisticated web-based system that emails you whenever your business is veering off-course, there are tools that can help you manage your business like the large corporations.
The first step in understanding your business health is to understand why your business needs such monitoring. And the second, is to find a qualified professional in this field that can assist you in setting up your scorecard.
Let’s talk!
Call us today at 310-216-7632 or email us at Rnorris@ricknorriscpa.com for a free consultation.
"Rick Norris has been an outstanding business advisor & tax consultant
for my company. We have, and continue to, rely on him for advice
regarding strategic planning, business issues, as well as tax preparation. Truly an outstanding business executive."
Randy Parker
PARKER MUSIC GROUP
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