Business Counsel A Forum for Ideas and Exchange

The Process of Decision Making

2012-02-07T21:21:00Z

Leaders must make decisions on a daily basis. Some decisions are simple, require little thought and can be made using experimental data, learned knowledge and gut instincts. Contrarily, other decisions can have long-term consequences on the future direction of the company and thereby demand deeper strategic thinking and analysis.

Unfortunately, too often leaders do not distinguish the level of analysis that must be performed based on the future impact of the decision. This results in a negative impact to the company, as decisions that should have involved in-depth analysis are made with more of a “shoot-from-the-hip” mentality and the consequences become evident as hindsight proves invaluable. This is especially true in middle market companies, which characteristically are void of executive boards that assist in the vetting process.

In larger corporations key decisions require upper management sign-off and possibly board or committee approval. With such policies in place, in theory, the outcome has a greater chance of success since the various angles are considered and the people who have the greatest knowledge or impact on a decision are included in the process. In middle market companies however, a solo process is often involved and decisions are commonly made sporadically, without adequate contemplation or sufficient data. In doing so, these decisions are often misguided and result in unintended consequences.

It is crucial that company owners and leaders first identify the level of thinking the decision requires and recognize their strengths and weaknesses in the process. Through such acknowledgement the leader can establish proper decision making methods that predetermine the level of strategic thinking and outside expertise that it requires. Given the fact that middle market companies inherently lack board structure and review, company leaders need to become self-disciplined, employing an internal policy that guides the process of decision making. Such internal checks and balances can ensure that the right amount of data is collected prior to execution. The key in employing such ideology requires a well-defined threshold on what can be decided upon immediately using past knowledge and gut instincts and what requires further investigation, analytical assessment and possibly outside guidance and expertise.

Development of such thresholds is unique to the company and the decision maker. It depends on the leaders’ expertise and the potential impact the decision can have on future company operations. For example, execution on a new product line requires marketing, operations and financial acumen. A leader with a strong sales background may be capable of defining market demands but should consult outside expertise when forecasting profitability. Commonly middle market companies make the fatal mistake of responding to the market demands at the expense of profitability, as true cost accounting is not employed. On the flip side, financially minded leaders may have thoroughly calculated ROI only to realize that the selling price point required to satisfy the financial model is not market centric. In this case, the decision makers would have been well-served if they had defined their threshold in advance, and consulted with others in the company or gained outside expertise prior to making the final decision. By employing a “decision strategy” a middle market company can emulate the board-like structure of their large corporate counterparts and in theory, make better decisions.

This blog could not be complete without heeding one warning about corporate “board emulation”. Lately we have heard about corporate boards that have been “asleep at the wheel”. Perhaps middle market companies can use the decision making threshold concept, as expressed herein, to set a new standard of effective decision making. In this they can demonstrate true and effective cooperation between thought leaders, experts and company decision makers in a way that someday large corporations will be looking down market to emulate their smaller counterparts.

What is strategy?

2012-01-31T21:20:00Z

Company owners and managers often believe they are engaged in strategic activities when in reality they are not.

A description of thestrategy-driven organization

The strategic plan must determine how to create value for shareholders and other stakeholders
Strategy is about positioning the organization for sustainable competitive advantage
Strategic determines which industries to participate in, what products and services to offer and corporate resource allocation
Strategy is about the overall vision and goal of the company. The basis on which the company will compete (price, features, etc.) who will be considered competitors, what products and services the company will offer
Growth strategies need to consider the amount of access to financial capital, human capital and other available resources in relationship to market opportunities

Strategic Marketing

Requires an understanding of your industry, especially emerging trends.
Requires an in-depth understanding of your target market, why they choose to buy your product/service and what messages they are hearing from your competitors
Strategic marketing programs are aimed at achieving specific results (branding, sales, conversion)

Tactical Marketing

Tactical is the execution of the strategic plan-the budget allocation is applied based on the activities identified (direct sales base,collateral. PR/Media placement, trade shows, etc.)
Tactical marketing is the ROI barometer-it is where the success of the strategic plan is measured

Purchase ebook BUSINESS SIMPLY PUT Planning Your Company's Growth: A 10 Step Guide to the Strategic Planning Process www.BusinessSimplyPut.com

How to compete when companies are faced with an unavoidable and inevitable erosion of their market

2012-01-24T21:20:00Z

The change in market dynamicsmay be caused by intense competition locally or abroad. Companies that havesuccessfully competed may suddenly find themselves in a new competitiveenvironment. When this occurs they have several options, they can search for a capitalinfusion, in order to create a new or refined business model, change manufacturingprocesses through off shoring or outsourcing, or close operations altogether.

It could be argued that eachand every company will face such a dilemma; it is not "if"--just "when". Thisstatement has been made evident as many of our corporate darlings that have stoodthe test of time, are currently struggling to stay alive in the competitivelandscape. America'sbeloved industries - the airline industry, the automotive industries are allunder aggressive attack.

So how does a middle marketcompany continue to strive or at least compete when they look around them tofind the customer's preferences have changed, the supply chain has evolvedthrough more efficient means of production than the one that they currentlyembrace or the demand has shifted entirely?

Middle market companies needto be strategic in their thinking. Focus on ways to take advantage of localmarkets first, creating a dominance and cash flow to assist as they expandregionally--nationally--internationally. Companies often make the mistake of tryingto expand before they have created a solid footprint.

What is a Leader

2012-01-17T12:01:00Z

The organizational culture can have the profound ability to enable or hinder the company from achieving its strategic objectives. A company can benefit greatly by identifying the kind of culture that supports the mission, vision and strategic intent, and them concentrating efforts towards developing that those mores.

There is nothing more powerful than the human spirit. When it is allowed to thrive it has the ability to move mountains. However, as strong as the spirit can be, it can also be fragile and easily damaged.

I believe that the most important gift that a leader can give to others is an opportunity to discover and nurture their talents. Those who I have supervised have sensed my compassion and willingness to work alongside and support them in the development of their personal goals.
In order to reach this sacred point, employees must be provided with the safely and security to express their talents. Therefore, I believe in providing others with a safe working environment that allows and accepts mistakes.

I encourage risk-taking while at the same time I teach accountability. Budgets are provided as a means of defining the overall parameters and to create accountability to the organization. The individual determines the budget breakdown for each project; thereby, allowing them to choose the best means to achieving the organizational goals.

Although any changes have taken place in the business environment one things has remained consistent: the qualifies that make a true leader.

Lori Williams has released two new e-books available in PDF format and on Amazon for Kindle. Visit www.BusinessSimplyPut.com and click in ebooks to learn more.

Creating High Performance Teams

2012-01-10T10:42:00Z

Most professionals and novices alike recognize the key ingredients to building a high performance team: persistence, patience, providing the necessary skills and tools.

A more delicate subject that is inherently as important as those stated above is protecting and encourgaing the team by removing those who are not capable, either by skill or attitude, to deliver the level of perforamce the team requires.

Too often ineffective people are not removed in a timely manner and therefore impair the overall performance.

As Jim Collins eloquently expressed in Good to Great, it is about getting the right people on the bus and the wrong people off the bus.

Regarding the team needing a leader, a leader is needed to embolize the actions that lead to the results, create the vision and make the proper choice of team participants, as stated above. However the utimate goal of a successful leader is to create an environment where the leader is there to provide guidance but the team members have ownership of both the processes and the outcome.

Lori Williams has released two new e-books available in PDF format and on Amazon for Kindle. Visit www.BusinessSimplyPut.com and click in ebooks to learn more.

Executives need to rely less on “doer” assistants

2012-01-03T10:40:00Z

As a growth strategist advising companies and owners, I have always counseled mid to high-level executives to delegate lower-level tasks so that they could fully concentrate on “heavy lifting” brain work. In the old days (circa late ‘90s), an executive’s time was best spend in the meeting and not scheduling the meeting. Support personnel are there to answer phones, make travel arrangements and prepare meeting documents. This was a basic management principle introduced in the ‘80s that had long been converted into gospel.

All my professional life, I’ve heard my inner consulting voice whispering “Delegate, delegate, delegate.” Of course, being a bit on the controlling side, I constantly find myself handling most of my own office tasks like scheduling, requesting information, returning phone calls, researching etc. Of course, I never want to be accused of being the “plumber with a backed-up sink,” so I decided to heed my own advice.

Two months ago, I started making an audit of all of my mundane daily activities in order to determine what I can safely pass along to assistants. After all, that’s what assistants should do, right? I wasn’t too far along into my audit before I start questioning the logic behind delegation. I am now convinced that the basic formula for determining what tasks are worthy of delegation has been forever changed by technology. When using a time and efficiency scorecard, self-reliance deserves better marks than delegation. During the course of my experiment, I discovered that it was actually taking me more time to explain and delegate a task than to just use available technology to take care of it. It seems that most of the daily activities that would have been handled in the past by an assistant are now best handled with the aid of few handy electronic tools.

Let’s consider some of my most critical daily duties:

First task: Scheduling a Meeting

Usually I handle all of my calendaring through Microsoft Outlook. It takes minutes to record an appointment, email an invitation and then hop on the Internet to send a list of directions to my PDA using Mapquest.com. Taking the slow route, I first emailed my assistant about my intent to schedule an appointment. After discussing the merits of various preferred dates, we proposed and confirmed an appointment with my client, who called later that day to reschedule. Another conversation with my assistant on preferred dates and the chain of events rattled again. In the end, it took more time and effort to work through my assistant than if I had just called my client directly.

Next Two: Answering the Phone/Returning a Call

Next, I charged my assistant with two tasks that were created just for delegating – answering the phone and returning a call. Surprisingly, they turned out to the biggest time wasters. Callers needed to speak to me, not my assistant, so there wasn’t much she could tell the caller other than that I would get back to them, which they probably could have guessed anyway. Additionally, there wasn’t much lag time between my assistant’s return call and mine, making the whole process seem even more futile. I wasted more time asking my assistant if she had called someone back and what they had said, when I could have just asked them myself. Furthermore, I questioned whether the extra “customer service” was actually more of a nuisance to the caller. There was a time when an unanswered phone was seen as unprofessional. However, today I think if given a choice between speaking with an assistant and just leaving a voicemail, I would much prefer the voicemail. That way, I can leave my message exactly the way I want it and know that it is delivered intact just the way I recorded it. Most assistants just inform you that your client is out of the office and ask if you’d like to be transferred to voicemail.

Last Chance: Good Old-Fashioned Research

Before reverting to my modern ways, I decided to delegate one last task – researching publications for advertising prices.

After emailing a lengthy paragraph of instructions to my assistant (I’m big on clear and precise instructions), my assistant responded with a list of links to publication websites. While meant to be helpful, I found it difficult to navigate through the maze of links. It was like starting in the middle of a book and having to figure out what part of the story you’re in. In the time it took to figure out where the links were leading me, I could have found my information through a simple Google search and moved on to my next task.

I’m not saying that assistants aren’t important or needed – somewhere in Downtown Los Angeles a corporate assistant is holding a triple vanilla soy latte and shivering in fear – no, not at all. Today’s executives need a new breed of assistant. Gone are the days of doers. What executives need are thinkers. Decades ago, technology replaced the factory worker. Now, the task-minded assistant has been replaced with online tools like Google, Map Quest, ACT and others. The modern assistant should be able to make decisions and use deductive reasoning. Given the amount of information readily available at the click of a mouse, they must have the aptitude to research and identify options, make appropriate evaluations and then present executives with a well thought-out summary in an easy-to-read format (not just web links).

I’ve since returned to my tech-centered, self-controlling ways. I can handle mundane lower-level tasks; what I really need is someone who can take on some of this "lighter" brain work.

Lori Williams has released two new e-books available in PDF format and on Amazon for Kindle. Visit www.BusinessSimplyPut.com and click in ebooks to learn more.

Exclusive Contracts with Distribution Companies and Channel Partners

2011-12-27T10:35:00Z

Manufacturing companies struggle with the question of whether they should grant exclusive rights to dealers or distributorswho are selling their products.

In order to properly answer that question, companies need to thoroughly analyze both the ROI and the opportunity cost of the relationship. This requires considering the potential market share gained/lost with the relationship. In other words, how much market share do they currently have and how much potential market share can they capture with an exclusivity.

For example, if you are a manufacture and one of your dealers represent 1% ofthe potential market share in their geography, do you really want to offer themexclusivity? If you offer exclusivity and they do not work theterritory properly, you have removed 99% of the markets potential. For this reason, exclusivity should be granted based on each dealers ability to capture the highest market share. Contracts should have renewal dates so that the relationship can be continuously monitored and reevaluated.

Lori Williams has released two new e-books available in PDF format and on Amazon for Kindle. Visit www.BusinessSimplyPut.com and click in ebooks to learn more.

How can you transfer a leadership competitive edge to the strategic alliances and strategic partnership?

2011-12-20T10:36:00Z

Thiswill become especially significant as companies move towards outsourcing and independent dealer/distributors in order to grow the business. Many independentcontractors, smaller companies and even large vendors may participate inthe completion of the final product. It will be imperative than those involvedmaintain a level of commitment representative of the main company.

I personallyexperienced the difficulty of this in developing my advertising agency. Ascommon in the industry, we utilized many freelancers. We were constantlystruggling to maintain our desired level of customer service when others didnot always follow through.

So how do you ensure that your firms' desire for quality and customer service transfers to all the partnerships--you incorporate the same process and monitor them as you would if they were directly under your roof. Meet with each partner with a goal of creating a seamless existence. Ask their opinion--adopt similar forms and processes, implement a Q&A process that crosses all borders. Your partners will more than likely be happy to contribute as it is also in their best interest. On a last note--if they are unable to perform find someone else as there is always another firm willing and capable to take their place.

Lori Williams has released two new e-books available in PDF format and on Amazon for Kindle. Visit www.BusinessSimplyPut.com and click in ebooks to learn more.

Due Diligence for a Merger and/or Acquisition

2011-12-13T10:34:00Z

Preparing for a merger and/or acquisition requires due diligence in the key areas: finance, marketing, operations and management.

Finance--gather all financial and legal documents. Check key ratios and benchmarking statistics--be prepared to explain any unfavorable results

Marketing--know the potential market share and the percentage of your market that you have captured. Be clear about your client base and why they buy. Know the ROI on your marketing efforts.

Operations--know profit margins and make sure you are following proper cost accounting methods. Have processes and procedures clearly documented.

Management--make sure all key executives are clear and consistent with the vision of the company and can clearly articulate the strategy

Lori Williams has released two new e-books available in PDF format and on Amazon for Kindle. Visit www.BusinessSimplyPut.com and click in ebooks to learn more.

Year End Forecast-Last Chance to Make a Difference

2011-12-06T10:41:00Z

The first part of the year has been difficult for most businesses.In response to these hard economic conditions company owners were forced to cutexpenses and in many cases lay off staff. In the last few months there have been subtlesigns that the economy is recovering and business is starting to pick up—may Irepeat subtle. For companies with longer sales cycles it may be some timebefore they experience an increase in business.

Given the half-year mark, company owners need to accuratelyforecast the remaining months to determine their financial position at the endof the year. Credit lines and bank loans are reassessed based on year endfinancials. The income statement for the year prior will determine the availabilityof credit to run operations as the economy improves in 2012. For some companies,a positive net income (or only a small loss) will be a necessity to gain accessto funding, which is used to purchase inventories or hire employees to takeadvantage of future opportunities.

As I review my clients financials. I am creating a year-endforecast by assessing submitted client proposals and the salespersons pipeline.I am actively speaking to each salesperson to get realistic numbers on what “theystrongly believe” will close this year. I preface my discussion with the factthat financial decisions will be made from their anecdotal information. In this,I wish to discourage over optimism from a believe they are being judged forperformance. And then, of course I am discounting their answers to stay on theconservative side.

From there I juxtapose the sales forecast with our currentrun rate (monthly overhead) and add it to the existing income statement to predictthe year-ends income statement. This final number tells me whether it is timeto cut more, aggressively ramp-up sales or a little bit of both.

We are over the half-way mark, for companies with a longersales cycle this may be the last chance to adjust sales and/or expenses. Don’tsit idle and hope things will just work out. Instead gather the information,begin the discussions and break out the calculator. The numbers may not bepretty but as I tell my clients, I have never seen anything good, ever come outof ignoring reality and now that we know, we can at least do something aboutit.

Business Owners and Managers need a Basic Understanding of Finance

2011-11-29T10:29:00Z

It is imperative that business owners and managers develop basic financial management skills. Expecting others in the organization to manage finances is clearly asking for trouble. Basic skills in financial management include critical areas such as cash management and bookkeeping, which should be done according to certain financial controls to ensure integrity of the numbers.

Business owners and managers should also learn how to generate financial statements (from bookkeeping journals) and analyze those statements to really understand the financial condition of the business. Financial analysis shows the "reality" of the situation of a business. For this reason, financial management is one of the most important practices in management.

Ratios analysis is a vital tool when assessing a company’s strength. Extracting and comparing data can offer additional insight and information. This form of comparison provides information that may not have been easily visible at first glance.

Lori Williams has released two new e-books available in PDF format and on Amazon for Kindle. Visit www.BusinessSimplyPut.com and click in ebooks to learn more.

Who is my customer today and who will be my customer tomorrow

2011-11-22T10:25:00Z

The average company size has changed significantly over the last decade, especially in California. This changing dynamic is causing many companies to ask the question,

"Who is my customer today and who will be my customer tomorrow"

The small business has become the key driving force of the American economy. The California Association of Independent Business, Inc. provides the following statistics:

California businesses averaging 5.8 employees comprise 98% of all businesses in the state, provide 82% of the private sector jobs and 75% of the gross state product. The Technology Trade and commerce agency reports that California has over 1 million small businesses, employing over 7.8 million people, and over 2 million small businesses with no employees.

This paradigm shift represents new opportunities for those companies who embrace this dynamic new marketplace.

Lori Williams has released two new e-books available in PDF format and on Amazon for Kindle. Visit www.BusinessSimplyPut.com and click in ebooks to learn more.

Marketing for Service Firms

2011-11-08T10:21:00Z

Successful service firms have a clear understanding of the business environment in which they operate. They invest in industry research in order to clearly define target markets; thereby knowing how to position their company in response to market needs.

Due to the intangible nature of service firms, market research is a crucial component of brand strategy. The core competencies of the firm must be aligned with the needs of the market, while simultaneously addressing profitability and growth metrics.

Distinctive Characteristics of Services

Intangibility- Unlike products, services can not be seen, felt, tasted or heard before bought; the true value (gain or prevention) is through the actual experience of buying. To reduce uncertainty buyers will look for evidence of quality.

Variability- Service buyers are aware of the variability and seek firms with known reputations. Process must be standardized and clearly communicated beforehand.

Inseparability- In the case of professional services, buyers are very interested in the service provider. Since the client is also present during the service process- the provider-client interaction is a special feature of the services marketing. Additionally, time limitations on behalf of the single service provider exist, which can be addressed by addressing larger groups.

Lori Williams has released two new e-books available in PDF format and on Amazon for Kindle. Visit www.BusinessSimplyPut.com and click in ebooks to learn more.

What Next--Preparing for the Future

2011-11-01T10:19:00Z

A discussion about what to do after the recession seems almost futile given the unrelenting torrent of bad economic news. Nevertheless eventually the credit markets will flow once again, consumers will be plagued by pent-up demand and businesses will respond by rebuilding depleted inventories. To this end, business decisions made during the recession will determine the company’s ability to take advantage of growth opportunities once they materialize.

During the economic crisis many company leaders have turned their focus inward, overseeing operations and losing sight of the marketplace. As a result, fundamental changes in the industry, paradigmatic shifts in consumer behavior or competitor innovations may have gone unnoticed. Moreover, the recession has not affected all industries equally nor will the recovery offer parity. Some industries will experience a quick sustained turnaround while others will be vulnerable to growth volatility. Business leaders will need to remain vigilant; preparing their company internally for the next stage while keeping a watchful eye for any signs of recovery.

Lori Williams has released two new e-books available in PDF format and on Amazon for Kindle. Visit w ww.BusinessSimplyPut.com and click in ebooks to learn more.

Reserve Cash for Reinvestment

2011-10-25T10:18:00Z

With declining sales businesses are quickly burning through cash reserves. Moreover the company’s balance sheet may preclude bank financing and asset based lending will increase the cost of capital, placing additional pressure on already declining margins. As the companies are affected by the recession so are their vendors and suppliers, who going forward may require stricter payment terms or additional deposits. Therefore, when the economy finally improves adequate cash may not be available to finance inventory purchases. Companies who have access to adequate capital will have a competitive advantage in their ability to quickly respond to market demands.

An effective cash flow strategy should include capital to rebuild inventories when the economy recovers. Contact key suppliers and vendors to inquire about any potential account payment changes. If a shortfall is predicted and bank financing is not an option, interview financing companies. Learn their lending criteria and cost of capital in advance, thereby allowing you to build the additional fees into your pricing model. Don’t get caught in a “cash management shortfall” having only planned up to the recovery and not beyond.

Lori Williams has released two new e-books available in PDF format and on Amazon for Kindle. Visit www.BusinessSimplyPut.com and click in ebooks to learn more.

The Best Business Answer is Sometimes "It Depends"

2011-10-18T11:57:00Z

The best initial response to a business question is, “It depends”. This is due to the fact that business is multi-dimensional and interrelated. Many factors should be considered before making a final decision. However, in business this is not often the case. Instead snap decisions are made with limited information, which leads to unwanted outcomes.

For example, here are some commonly asked questions:

Is this profit margin acceptable?
Should we hire additional people?

The proper way to answer these question are “depends” and then to consider the implications financially, operationally and strategically.

If the profit margin covers expenses and allows money for reinvestment then yes, it is an adequate margin.
If there is enough cash flow to hire the additional employees and the demand is strong and expected to remain that way then yes it is a good idea to hire additional people.

Unfortunately decisions are often made without such considerations; product/services are sold at profit margins that do not consider all expenses (including time investment) or if there is enough net profit for reinvestment. Hiring decisions are based on a belief that sales will continue at the same rate independent of past history or expected trends in the marketplace.

Lori Williams has is a business strategist and the author of several books under Business Simply Put. The can be purchased on the website at www.BusinessSimplyPut.com or through Amazon on kindle ebooks.

Importance of Gross Margins

2011-10-04T15:49:00Z

Gross income divided by net sales, expressed as a percentage. What remains from sales after a company pays out the cost of goods sold. To obtain gross profit margin, divide gross profit by sales. Gross profit margin is expressed as a percentage.

Importance of Gross Margin:

Gross margins reveal how much a company earns taking into consideration the costs that it incurs for producing its products and/or services. Gross margin is a good indication of how profitable a company is at the most fundamental level. Companies with higher gross margins will have more money left over to spend on other business operations, such as research and development or marketing.

Excerpt from the book, Planning Your Company's Growth A 10 Step Guide to the Strategic Planning Process , which can be purchased as PDF format on www.BusinessSimplyPut.com or on Amazon for the Kindle at http://www.amazon.com/dp/B005EJN03G

The Need for Strategic Planning in Every Company

2011-09-27T13:20:53Z

In 1942 Joseph Schumpeter in his work entitled “Capitalism, Socialism and Democracy” coined the phrase “Creative Destruction” defined as a “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Once again this concept is gaining popularity and being quoted by economist as they try to explain economic volatility. This resurrection is not due to a belief that innovation or creativity has increased but rather that the rate of destruction has accelerated.

It could be argued that each and every company will someday reach a point where the significant market shifts will no longer support the business model. If adjustments had been made throughout the years, these changes could have been seen as new opportunities rather than threats.

Overhead Performance Measurements

2011-09-13T15:37:00Z

Overhead Performance Measurements monitor changes in overhead expenses (SG&A). This chart complements the Profitability Performance Measurements by providing a breakdown of the individual overhead accounts.

The overhead data can be monitored month/month and/or year/year. Percentages are used to measure the relationship between the data and identify changes.

When reviewing the chart you are looking for spending fluctuations in comparison to an established budget. Additionally, the results should prompt business questions regarding budget appropriations and return on investment. For example, if the marketing account increased, you may want to know if the investment resulted in an increase in sales. If the insurance account increased, you may want to consider getting competitive bids next time the insurance is up for renewal.

If it is determined that the increase is permanent, the revised budgetary number can be plugged into the Profitability Performance Measurement chart (as an increase in SG&A) to identify how the cost increase will affect profitability. Management may need to determine how to counter balance the increase by increasing sales, decreasing production cost or decreasing a different overhead account to negate the increase in SG&A.

Excerpt from the book, Simple Math Calculations To Monitor Your Company's Performance: Monitor Company Sales, Overhead And Profitability, which can be purchased as PDF format on www.BusinessSimplyPut.com

Measuring Financial Relationships

2011-09-06T15:32:00Z

Companies are dynamic organizations with a myriad of business functions occurring simultaneously. In order for the company to grow, each business function must operate collectively to produce an output in excess of the input.

For example, sales (the output) must be higher than the cost to produce (input). The marketing department’s output (sales gained through the marketing programs) must be in excess of the input (cost of the marketing campaign). The cost to produce (cost of goods) must be less than the selling price with enough profit remaining to cover overhead and allow for reinvestment.

As you can see from the above examples, financial relationships exist within departments and business functions. When the financial relationships are aligned properly, a business will grow. However, if the financial relationships (between the inputs and outputs) become inverted, financial problems will develop. Therefore, it is the financial relationships (rather than just a set of static numbers) that must be measured and monitored. By monitoring these vital relationships, managers can proactively monitor profitability and address issues before they become a crisis.

The process of measuring financial relationships achieves two main objectives: (1) results can be measured against a set of performance indicators (2) trends can be identified alerting managers to business concerns.