Trying to run a business without useful and accurate performance information is like trying to drive a car without a speedometer. Sure, you will be able to guesstimate how fast you are going, and sometimes you’ll even get it right. You might even get away with a bit of speeding! Most of the time though, you will be driving at the wrong speed. You will either not be taking full advantage of the car’s performance or you’ll get a speeding ticket.
In a business sense, running a company without timely and accurate performance reporting may deliver occasional success, but it’s not a recipe for long-term sustainability. A lack of insightful reports detailing costs, sales, productivity and profitability generated through effective data capture at the source is likely to result in a lack of insight about what is critical to the company’s success.
Costs and Pricing
Production costs and pricing can be deceptive. Clearly, a firm must ensure ensure that the price they charge the customer accounts for the costs of the people and equipment directly involved in the production process. That price, however, also needs to have a sufficient margin attached to it such that it encompasses a share of all other cost overhead of the business, from rent and electricity, to paying for accounting and staff training. Furthermore, it has to incorporate a profit margin that will enable the business to retain some earnings for future investment and deliver a dividend to the investors/owners. Suddenly, the per unit price being charged needs to be much higher than may have initially been thought.
Without accurate information it can be easy to lose track of how effective this balance between price and cost is. Cross-subsidisation of profits across activities and products is another challenge. Soon enough, it can be almost impossible to understand what profit is being generated from each element of work. This can result in a situation occurring where both people and machinery are busy but the company loses money anyway. To avoid this frustrating eventuality, a business needs to ensure it is capturing and collating business information that will generate alerts at the time such a situation arises. Otherwise the problem will remain hidden and by the time it is discovered it will be too late to react with impact. Now the business is chasing its tail with the next piece of work not only having to cover all the standard costs but also make up for the losses incurred by the earlier work.
Identify Issues at the Source
If problems are only identified when complete revenue and expenditure figures are entered and aggregated within end of month financial reports, it is too late. Management needs to stay ahead of the game. A good manager needs to ensure that the business is capturing information throughout the production process, and that this information is able to deliver insights about the productivity, performance and profitability of its activities at any point in time.
Just as the job of a car’s speedometer is to provide real-time feedback, a business also needs to be able to read and react to its own (as close to) real-time performance. Without this structure the business is not being put in the best position to succeed, irrespective of any other activities underway.