I’ve long been a metrics guy. I believe in keeping score and have seen the value of a detailed report card. While the soft stuff matters, it’s the finances that really drive any organization’s success. That’s why I had to answer this question – and actually will dedicate two blogs to doing so:
“Many of my new managers just don't seem to ‘get it;’ how do I help them better understand how we make and lose money?”
We’ve talked about everything from work-life balance and the importance of community involvement to personally connecting with customers in this blog. But the truth is that if the company is not making money, nothing else matters. It actually is about the bottom line.
Now I know CEOs typically avoid that because it does sound harsh. But it is the reality and understanding how a company makes and loses money is absolutely essential to effective leadership. Leaders at all levels need to be able to execute on not just a business plan as it relates to products and services, but also the financial plan.
Often times individuals assuming a leadership position for the first time don’t have any formal business finance training, and it certainly does not need to be a prerequisite. However, that does not mean we aren’t responsible for educating them in this important area.
In this blog, I am going to focus on what leaders need to know about their company’s finances to be effective. Next time, I will share how to help emerging leaders understand them and the process we use at Marco.
Here’s what I feel new leaders need to understand about the company’s finances:
1. Inside the Income Statement
This is the one report that quickly tells leaders if the company is making money – or not. In an effort to not overwhelm the individual, these are the key metrics we use on a monthly basis to measure our success: sales revenue, gross margin, sales and marketing expense, general and administration expense, and pre-tax profit. It is important for every leader to zero in on the specifics for the areas they are responsible for and monitor how their areas are performing currently, compared to budget and compared to last year’s performance.
2. Behind the Balance Sheet
This can be one of those financial reports that typically gets overlooked, but it contains some key information leaders can use to make decisions. Here are some of the areas of the balance sheet we use: cash position (Is it going backward or forward?), inventory levels, accounts receivable, assets, and depreciation.
3. Industry Metrics
Every industry has its own standards. Leaders need to know how their business unit is performing compared to those benchmarks. At Marco, we try to be in the top quartile in our respective industries. For most companies, this includes gross profit margins (for both products and services). We also track selling expense, inventory turns, accounts receivable days, first call effectiveness, parts and supply utilization and tech productivity, among others. We try to compare our key performance indicators to industry benchmarks to evaluate our performance.
4. Contribution Margin
The key to engaging managers is to align their financial understanding with the specific areas they are responsible for and can influence the outcome of. A good example of this is contribution margin – the line item before fixed cost on the income statement – which we use to measure the performance of sales leadership. We do this because they can influence sales, gross profit margin, and sales expense. In our case, this is where we tie financial incentives to their compensation.
Educate for Better Results
When managers understand these key performance indicators and can interpret the information effectively, we have more engaged dialogue among our leadership team and can make better decisions for the company. The better you educate your people to understand the influences impacting your financial results, the more likely you’ll improve profitability.
Next time, we will talk about steps to take to help emerging leaders within an organization understand the corporate finances and be able to execute based on the results. Don’t want to miss it? Sign up for e-alerts today.