EOS Implementer Matt Hahne once impressed upon my team that people need to hear something seven times before they internalize it. Similarly, if you’re going to understand your company’s financial position in your operational terms – your key mesaurables, or KPIs – then you’ll need to see the relationship between those measurables and your financial outcomes over and over.
At SNS, we do that for our clients with the SNS Financial Pulse, and you should run it yourself. While there is some foundational lifting to get there, the SNS Financial Pulse itself has fairly simple components.
What You’ll Need
Accurate and Consistent Monthly Records
This means that you’ll need to implement some accrual-based accounting policies (“modified accrual basis” is a term you may hear from your accountant). For example, to measure profitability each month, you may need to begin recording depreciation on a monthly, straight-line basis. But a word of advice: stick to the 80/20 rule here. You don’t need perfection.
You’ll also want to have a checklist to follow once each month ends, to ensure that everything is recorded properly. It should have steps on it like making sure that accounts are reconciled, no transactions are sitting in “Ask my Accountant”, payroll is recorded right, etc.
Financial Projections
I recently spoke about these in an episode of Three Things in Three Minutes. You must have a plan to which you can compare your results. So, start with a profit and loss (“income statement”) prediction at a high level. You should predict unit numbers that will drive the financial outcomes, not the dollars themselves. These are your monthly key measurables. Here’s a basic example:
Predicted Widgets Sold * Predicted Avg. Price = Planned Revenue
Repeat the process for cost-side drivers, even if at a high level (example: Predicted cost of goods sold = 55% of revenue).
Putting it Together in the SNS Financial Pulse
Once you’ve deployed these tools, the rest is just using them and tweaking them as you go. At SNS, this is the cycle we run with our clients, so that we get a data point each month that shows them finance in their operational terms.
Quarterly
Update your plans. Predict the same units again. Why after three months? That is the happy medium that allows you to watch your business progress against a plan, but also respond to your changing environment to update the plan before things get so different that the plan itself becomes useless (as happens with annual budgets for small businesses).
If you are running on EOS or any other business operating system, this has the added advantage of being a perfect time to prepare for your quarterly planning session, enabling you to set SMART goals for your measurables that you confidently know will lead to the financial result that you’re looking for.
Monthly
Measure yourself against not only your planned financial outcomes, but also your predicted measurable outcomes. This is where you’re “told seven times.” Each month, you’ll see that hitting or missing that measurable prediction leads to the same result versus the financial plan.
If it doesn’t work at first, then go back and tweak the driver relationships in your plan. You’ll know what’s wrong. For example, you may not have accounted for that large order at a low price, or the extra income that you get from freight. You’ll get better and better at predicting, and more dialed into the “why” of your financial result before you even post your numbers at month-end.
So, give it a shot. And if you want someone else to do it for you instead, then call us!Series Next Solutions is building an enduring organization that accelerates small business growth by getting people out of the finance seat with data-driven solutions that do more with less. If you are interested in having Series Next Solutions operate your finance seat, then please contact John Marshall on LinkedIn, email info@seriesnextsolutions.com, or visit www.seriesnextsolutions.com.
