Throw Away Your Financial Statements: Managing by Metrics

Accounting systems have always had two primary goals: track information in detail and generate financial and operational reports. Until recently it has not been technologically possible to do anything else., except process information, create invoices, pay invoices, pay employees, track costs, and generate financial statements at the end of the month. That's fine, but the problem is that financial reports are sometimes generated forty-five or more days after a fiscal period begins and the information they present must, out of necessity, start at the highest, most general level. If the results are below or even above expectations, additional reports may need to be generated and studied in an attempt to determine what went wrong or right. In addition, the factors contributing to poor financial results may have started their downward trend at the beginning of the fiscal period and will therefore still be creating problems forty-five or more days later. I use the word "later" because the drill-down analysis will require several days if not weeks to complete, once the financial statements have been published.

This style of after-the-fact management may have been the only way to conduct business in the past, but technological and more specifically, reporting advances now make it possible to identify these problem areas as they develop.

Management by Metrics

Technology can currently support the concept of digital dashboards that can display information in a graphical format, with whatever level of detail may be required. Rather than starting with the highest level of information analysis and presentation (which are the standard financial statement) users can "flip" their priorities by identifying these critical KPIs, track these values on whatever time frame is best suited, isolate those KPIs that require attention, take steps to improve the KPIs, and then track the results to confirm that the steps taken have the desired effects.

The key to this proactive management style is that if the correct set of KPIs is identified, closely monitored, and effectively managed, the financial statements will take care of themselves. In essence management by metrics eliminates the need to publish financial statements and their underlying operational analysis reports. Managers no longer have to wait for periodic reports and then invest additional time trying to determine what went wrong (or right).

Naturally there is one significant proviso. While the concept of management by metrics will improve efficiency and effectiveness, it will do so only if the correct set of KPIs is identified, responsibility assigned to the correct set of managers, and managers react quickly to an ever-changing set of business imperatives.

To some extent it has always been possible to identify and publish KPIs. Most accounting systems support some form of report writer that allows users to extract the information required and publish that information in report format. In addition most products supports some form of export whereby information can be exported to a spreadsheet and KPI graphs can be created.

The advantage of a digital dashboard is that users do not have to rely on static reports that display a single value or even that value over x number of weeks or months. Presenting graphical information in a spreadsheet is almost the same as a digital dashboard but users do not have to export/import the information or flip from on spreadsheet to another to view multiple KPIs.

Putting Management by Metrics into Practice

Digital dashboards present constantly refreshed information to users and only the information of interest to that user is presented. Unfortunately most accounting software vendors have not yet taken the concept to its most effective potential so we cannot really cite specific systems as examples. I suspect or hope that vendors or resellers will develop their systems further or begin to really understand what Management by Metrics is all about.