Let's say you've decided to get on top of the financial side of your business. You want to put a mature foundation in place to help you grow your business and drive profitability and cash flow higher.
The goals might look like this:
- Focus our leadership team on the key drivers/metrics of financial performance.
- Create a reliable forecasting/projections process so we can evaluate the financial and cash flow implications of various scenarios, decisions, and strategies we are considering.
- Turn our monthly financial statements into an effective decision-making tool.
These three areas are either weak in your company or they're in dire need of what I lovingly refer to as "Adult Financial Supervision". J
The way you achieve your goals is to implement what I call the Monthly Financial Rhythm.
Here's how it works.
The Monthly Financial Rhythm is about setting operational and financial TARGETS, MONITORING projected and actual financial results, and making ADJUSTMENTS in strategy and execution inside the business when results differ from the target or expectation.
It's a monthly process meant to speed up and improve our decision-making ability. A fast feedback loop makes it possible to quickly identify strategies that need to change because results are not in line with expectations.
Target – The targets are usually the key financial and non-financial metrics that drive from the vision and strategy of the company. A company in restructuring mode would have different targets than a company trying to scale and grow. The targets can change as well depending on short-term financial goals. For example, one quarter you might have specific goals related to collecting receivables faster. Another quarter might include a focus on reducing a certain expense category. There will generally be about 3 to 5 targets at any time. But the mix of targets/metrics will vary during the year.
Monitor – Monitoring is about creating financial projections (expected financial results) and creating actual results. Projections are a fully modeled set of financial statements over at least the next six to twelve months. Actuals are financial statements and the related drivers of results that are fast and accurate. The combination of the projected and actuals results must be converted into insight (not just numbers or financials) for the management team. This is accomplished with the Monthly Confidence Package that is tailored to the business.
Adjust – Insightful financial information is then used to determine whether the specific action plans and strategies being executed throughout the company are working as expected. The management team is on board because they understand the financial goals and the related metrics being tracked. We have helped them learn how to use the monthly financial information to compare the actions they are taking in the field to the financial implications in the financial statements. Now they have a tight link between plans and the actual results. Adjustments to strategies and tactics in the field can be made quickly when the information suggests something is not working the way we intended it to.
The cycle continues every month by making any necessary changes to the financial targets and the resulting projections/expectations.
It's a monthly rhythm designed to focus on what matters most and turn your financial information into insight.
Inspired by The Lean Startup
As you know, I love the Lean Startup methodology. The image I created to visualize the Monthly Financial Rhythm was inspired by the Build-Measure-Learn Feedback Loop (or cycle) in The Lean Startup by Eric Ries.
In Lean Analytics, Alistair Croll and Benjamin Yoskovitz say:
"One of Lean Startup's core concepts is build – measure – learn, the process by which you do everything, from establishing a vision to building product features to developing channels and marketing strategies…
The faster your organization iterates through that cycle, the more quickly you'll find the right product and market."
The build – measure – learn approach says the fastest way to a successful new product (or service) is to:
- Build a Minimum Viable Product (MVP) and put it in customer's hands quickly.
- Measure how the customer purchases and interacts with the MVP.
- Learn from the information gathered and make changes to the product to make it more appealing and more saleable.
If the product or service bombs, fine. Learn why and make changes or move on to another idea. But do it quickly. And do it based on information rather than just your idea or concept about what customers want.
Looking at Your Financial Information in a New Way
The Financial Rhythm is similar in that we want to set financial targets and goals then work on achieving them. Then get fast feedback about whether we are actually achieving the goal or not. Then make changes within the business as necessary to achieve the goals.
The exciting part of the Monthly Financial Rhythm is that it forces you to think about your financial information in a new and exciting way.
Your financials must be fast, accurate, AND insightful. You can't rely on an outside CPA to create your financial statements and send them to you 30 days after the month has ended. That's way too slow.
And to be insightful, the financials must include projections so you have a clear expectation for what the numbers should look like before the month has even ended.
And there has to be a focus on the key drivers of performance so management can easily link the financial information to what they are doing day-to-day to drive results.
It's fun. It's rewarding.
And maybe, just maybe, it's time to put the Monthly Financial Rhythm to work in your business!
Try it! What's the worst thing that could happen? J
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