How To Improve Business Results
Every person managing a business aims to be successful. Success is defined in their own terms, with each person establishing unique goals, whether those goals are meticulously well defined or less well articulated. But success is not just reaching the goal at the end of the process, it also involves how well we are doing along the way.
One thing is certain. Success does not just happen; it comes to those who are able to use their environment and shape their circumstances to allow them to achieve the results they want. Two things are apparent. Success entails knowing firstly, where we are going and secondly, where we are now. In having goals it must be said that the more clearly defined the goals are, the easier it is to develop the means to achieving them. In business, goals are defined by establishing clear business objectives. The means to reaching those objectives is defined in a strategic business plan. This is an important tool no business should be without. After all, "nobody plans to fail, they just fail to plan".
To establish where we are along the way, we must be able to quantify our objectives and develop a method to measure our performance on the same basis. One of the major measurement tools in business today, the profit and loss statement, is derived from the double entry bookkeeping system used by accountants. This system was developed in the twelfth and thirteenth centuries, however it was not fully documented until a Franciscan monk named Luca Pacioli published a treatise on it in the year 1494. The system in use today is virtually unchanged from that described by Pacioli 500 years ago. For many small businesses, this system of accounting is the only measurement tool they use. For most, financial statements produced from this system are presented in a form that has been developed for the benefit of the taxation department and other users who are external to the business, such as bank managers and external shareholders. This means that as management tools they are of limited use. After all, how many other 500 year old tools do you use in your business?
In recent years there has been a number of advances in this area. Just as having objectives more clearly defined improves our ability to reach them, measuring performance more specifically enhances our ability to identify ways to improve results. One way to achieve this is simply to measure performance more often. The traditional annual financial reporting sought by small business owners, has been shown to be a less than adequate tool for managing performance. The business owner would see the accountant at the end of the financial year to find out how the business performed for the previous year, by which time it was too late to do anything about the result. More frequent financial reports provide the opportunity to identify negative trends earlier and take appropriate action. However this is still a reactive, rather than a pro-active, approach.
In order to use the environment and actively shape circumstances to our own advantage, we need to first have specific objectives and then receive feedback as quickly as possible after the event. The more specific that feedback is about unique aspects of the performance, the more precisely we are able to pin-point areas to create improvements.
Like that other ancient invention, the wheel, the double entry accounting system has not yet outlived its usefulness. It just needs to be used more appropriately for this modern era. We need to use the information that can be derived from this system as the raw materials for the management tools that are now available, the end product being useful performance measurements that give us the information to be able to make intelligent management decisions to improve performance, rather than rely solely on gut feelings and intuition.
When we boil it all down, most performance improvement comes about by being able to achieve a competitive edge. This means we need to discover a way to intervene, to affect the circumstances or create an environment that is slightly more favourable to our point of view. The most common outcome we seek is to create a situation which is more economically advantageous to us.
Accountants have always told us we need to increase our revenues and reduce our costs. There are now management tools available to help us find practical ways to do this. Our goal in management is to find ways in our business to become more effective and productive. One new tool has been developed, namely, ACTIVITY BASED COST MANAGEMENT, which allows us to focus on the key factors that drive the business. To reduce costs or increase value, there needs to be a management accounting focus, rather than the old financial accounting approach. Under conventional accounting, costs are recorded by category, e.g. wages, rent, advertising, power, etc., and then allocated to profit centres (products, floor space or labour hours) on some arbitrary basis.
Under ABCM, costs are measured for specific activities and are allocated according to the factors which cause the costs to be incurred. ABCM can be used to make better decisions about product costing, or to calculate customer profitability or to analyse labour productivity. By using the activity based information generated, we are able to identify opportunities to eliminate waste and improve effectiveness.
Relevant performance measurements give us the ability to make more intelligent management decisions.
While this can be a more sophisticated technique than is required in the smaller business, the method can still be adapted with positive effect. By generating more frequent conventional financial reports and analysing the data provided within those reports in greater depth, valuable information can be gleaned.
Establishing clear targets for productivity and obtaining regular and timely feedback on performance will provide managers of even the smallest of businesses with the tools to improve business results.
The real key is to take some time off from the activity of doing business and spend a small amount of time in planning and analysing the results. By doing this, problems will be identified before they have the chance to create long term adverse effects. Competitive advantages will also be brought clearly into focus, allowing the manager to implement more effective strategies and achieve more positive results.
Improving business results is something we all strive for. It makes good economic sense to use the latest tools in all areas of our businesses, rather than rely solely on conventional tools produced in a bygone era.
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About the Author
Greg is Managing Director of Progressive Business Solutions Limited, a business development consultancy firm which has branches in
Visit Greg's site: http://www.small-business-success.ws
Source: http://www.websition.com/
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