Matching Financial Metrics
Traditional financial performance measurements are often applied uniformly to all business operations without regard to variations in strategies and / or stages within the business cycle. For organizations with diverse operations and different units or divisions, there is a need for different performance measurements since each unit has a different strategy. Forcing a one size fits all approach to performance measurement results in erroneous comparisons. Start with strategy and build measurements to fit strategies, not the overall organization.
Additionally, financial performance measurements need to consider the life cycle of a business unit. For early stages in the cycle, there is high growth, large investments and little or no working capital. Performance measurements need to focus on sales and market growth as opposed to immediate profitability. As the business stabilizes, growth slows down and the focus shifts to maintaining market share and sustaining the organization. Traditional financial performance measurements will now be employed, such as return on equity, return on assets, etc. The next stage in the cycle is maturity. All major investments have been made. Most investments are short-duration for maintaining the existing organization. The main emphasis is on cash flow; especially operating cash flows. Thus, performance measurements tend to emphasize cash flows for mature business units.
Performance measurements are not static. You have to review and revise measurements in relation to strategies and business cycles. The best managed companies seem to understand that some measurements are emphasized over others in relation to strategies and cycles within the life of an organization.
Written by: Matt H. Evans, CPA, CMA, CFM | Email: firstname.lastname@example.org | Phone: 1-877-807-8756