I was talking to a client recently about their business. They were explaining to me what information they wanted to see on a regular basis that they believed would help them monitor their business. The indicators he felt were key were Turnover (sales income), Profit, and Cash in the bank.

Without wanting to start an argument there and then, I realised that I have a lot of work to do to get the business owner to understand what he really needs to know, why he needs to know these things, and what he needs to do about things when they are not good.

I have often talked about the Balance Sheet being more important than the Profit and loss, and I still stand by this statement. The Balance Sheet tells you what you own, who owes you money, and who you owe money to. These three facts give you a far better snapshot of your businesses health than any other measurement.

Take cash in the bank as an example. It doesn’t include cheque payments to suppliers that have not cleared. It doesn’t tell you how much you are owed by customers, or how much you owe to your suppliers.

Profit is a nice measurement if you are the taxman, but it doesn’t tell you how profitable you are. Making more profit than last year might sound good, but what will you do if you are only making 10% net profit, when last year you made 15%?

Running a business requires focus on the future. A review of the past is helpful, but only if you do things differently as a result of the lessons you have learnt. If you are measuring your performance by the wrong indicators, do you even know what those lessons are?

A good management accountant is worth their weight in gold. Not because they will generate sales, or improve your PR, but because they will keep you focused on what is really important to the long term survival of your business.

It doesn’t matter whether you are a sole trader, have a turnover of £100k, £100M, or are the Chancellor of the Exchequer, the same principles apply:

• Create Key Performance Indicators that are relevant to, and understood by, all those involved – and don’t just focus on the financial KPI’s. Take advice on KPI’s, you need to be objective.
• Identify what KPI’s are leading indicators, and which are lagging indicators.
• Use qualitative and quantitative measures. Ask for suggestions, and not just from those within your organisation.
• Be aware of how KPI’s affect people, and how change makes them feel.
• Know the difference between making an investment, and incurring an expense.

When the world around you appears to be losing its way, make sure you have someone who is prepared to talk to you about the reality of your financial priorities.