We are unashamed fans of data. We analyze, create metrics, look for trends, form forecasts and use the data of our clients’ organizations and their marketspace to show us the current and future operational landscape. In other words, we use the data to get rid of uncertainty.
Data is critical and most of the time underutilized or ignored. In this era it shouldn’t be and in fact to do so leaves one at a distinct competitive disadvantage. Although it is possible to drown in data there are a few data essentials that yield results and allow for ongoing fiscal maintenance and the initial stages of forecasting and strategy.
The first step in utilizing your data is assessing your accounting methodology and discipline. Is it solid? If it isn’t or you don’t know, fix it now. If your data is not reliable no decision you make will be solid, especially on lower-margin projects. Any data you publish to lending institutions or investors has the potential to be incorrect. To understand this is absolutely critical. Correcting the errors is not necessarily a large and painful process – we have performed this exercise in the past with clients quickly and timed it appropriately to take advantage of accounting periods. The important thing is getting it done.
The second stage is to analyze the financials for weaknesses. What are the books saying? What are the basic financial ratios stating? Perhaps most importantly, what does the statement of cash flows look like? Where are the money inflows coming from? The most immediate assessments on health and initial corrective actions are made here.
The next step is to analyze profitability by customer or product line. Rank them top to bottom based on profitability, using as much historical data as possible so that trends can be determined. What is causing the lower margin customers or products to be at the bottom of the list? Is it a high quantity project that offsets the lower margin because of the volume? If not, are there expenses that are pulling it down that need to be controlled? Is the sale price too low? Would dropping the customer open up capacity that could be utilized with another customer at a higher margin? Can the product line be outsourced more cheaply? Ensure that all overhead costs are applied to your work as well – allocating all costs across your work-related revenue streams will lower your margins, and it should. Not recognizing those expenses can cause confusion and operating losses where profitability appears to be.
These are the initial actions that are almost always high yield if the proper accounting data set has not been maintained or used; it must be remembered that correct accounting is foundational for all analyses, because it is the analysis that creates the backstory for each decision. To forego the due diligence in the accounting realm and jump to decision making is to set the stage for further issues that could have been prevented.
Each of these exercises should lead to further refinements. Most importantly, knowing these topics allows an organization to begin taking control of the business and create strategic advantages. Not the least of which is understanding the limits of profitability due to internal constraints and how to address those limitations.
