We start a new series this week with a look at some financial management issues that every business owner should be looking at on a regular cycle, well at least twice a year. Performance Management? What is it? How do we define it and even if we get the numbers, what do we do with them? Let’s start by unpacking some of the mysteries and terms related to Performance management in your business.
The bottom line…The amount of profit a business has made is a universally accepted standard for keeping score the world over. We always measure how successful a business is by the amount of profit it has made. Banks will offer more credit to more profitable entities. It does make sense because the net profit represents the true income of the business, and consequently of the owners.
The increase in sales, gross and net profit are some of the basic Financial Performance Indicators (FPIs) that any business person would keep an eye on to ensure that the business is viable. The downside, however, is that the managers or owners get caught in the rut of profit chasing at the expense of the very reason the business was set up the in the first place.
Financial Performance Indicators are vulnerable to manipulation. Managers become obsessed with reducing costs even at the expense of the organization’s long-term viability. This is because recognition, bonuses and even promotion are linked to how profitable a manager is. These cost-cutting measures may impact negatively on staff morale, quality of products or services etc. Focusing on the bottom line disregards what actually drives the profitability of the business.
Is there a solution to this myopia? Is there a way to balance the objectives of the business to ensure longevity? We explore this in the next post.