The end of a business year is always an interesting and stressful time for those in a business leadership role. They are trying to simultaneously manage the numbers, shareholder expectations, and close the year strong... with an eye on a fast start for the following year. During the last few weeks of December, we typically see;
- Sales is pushing to close deals
- Manufacturing pumping out products
- Supply Chain trying to empty the warehouses
- Finance collecting receivables to pay bonuses
- HR pulling together data for performance reviews
All of these business factors and actions have financial and other specific metrics that leaders review to make final decisions that determine the future of the business and the engagement of current and future employees such as;
- Sales has revenues
- Manufacturing has capacity and cost efficiencies
- Supply Chain has inventory days on hand
- Finance has cash in the bank
- HR has forms and reviews being filled out
Each of the elements I mentioned can be specifically measured and quantified. If used with strong business acumen skills, the interpretation of the numbers can create a culture of accountability and provide leaders with the tools they need to give feedback and coaching to their teams. As we get close to the last days of the year, I believe it is important for business leaders to remember something very important: “The numbers don't lie.” While there may be extenuating circumstances and supporting stories around all business metrics, it is critical for business leadership to have the business acumen skills to know what the numbers say, what they don’t say, and what to do with them.
In a previous blog post, Defining Business Acumen we provided you with insight and a clear overview of how we define Business Acumen skills. Today, here are a few leadership development thoughts on why having the right business acumen skills can help make sure that leaders are seeing the right things in the numbers.
1) Revenue and Profit Target
The Profit & Loss statement (P&L) / Income Statement shares information on revenues, expenses, and profit. These numbers are very clear and there is little misinterpretation. Business leaders need to look at two primary areas and determine if the functions driving them achieved their targets:
- Revenue – Driven by Marketing and Sales. What was the target and what was achieved?
- Expenses – Driven by Supply Chain, Manufacturing, Marketing, Sales, R&D, HR, and Finance. What were the budgets? Were they under plan or over plan? Was the expense target achieved?
A healthy balance sheet usually means a healthy company. There are several elements on the balance sheet that drive it's health:
- Cash – Do we have enough? Are we collecting our receivables? Are we managing expenses? Are we managing suppliers?
- Net Assets – What are our net assets? Are they consistent with our business strategy? If we are trying to be Customer Intimate, do we have enough inventory? If we are trying to be Operationally Excellent, are we managing inventory on a just-in-time basis? If we are Product Leaders, are we producing innovative, high quality products and maintaining acceptable levels of inventory?
- Liabilities – Do we have too much debt? Are we providing a return over and above the cost of capital? Are we creating efficiencies in asset and profit utilization (ROA) relative to the liabilities incurred to run our business?
3) Free Cash Flow
Perhaps the most important metric of financial success is free cash flow (the amount of cash being generated by the operations of the business). The best way to calculate free cash is to subtract the organization’s capital expenditures from the cash flow from operations.
In each of the areas that I described, there is very little gray area as the numbers simply don’t lie. The question you need to ponder over the next few days as we enter a New Year is this: Do the people in my organization have the right business acumen skills to know if the numbers don’t lie?
Happy New Year and see every one of the “other side.”