Driving a Car From the Rear View Mirror

Mark Murphy | | Cadence

Many companies struggle to transition from driving the business with historical accounting data to driving it with predictive financial information. You worked hard to get good accounting data and find great comfort in knowing that these are your actual results. As a previous “Big 8” (how’s that for dating myself?) CPA, I have nothing against accounting data, other than the fact that it should not be misused.

Accounting data is a look backward. And it is very useful for several things like tax return preparation, banking documentation, profitability analysis and calibrating our financial predictors. But running the company from historical financials is like driving a car from the rear view mirror. It is dangerous.

First Just Look Out the Windshield

Moving into the world of financial prediction may appear as just “guessing” anyway, so why not just wait until the “real” financials are published? That’s why I recommend not trying to look 300 yards down the road at first, but just outside the windshield. Forget the three year plan and even the one year plan to start. Begin with trying to predict how this month will end.

At the beginning of each month, put a plan together for sales, margins, SG&A and the resulting operating profit. Then review and update that plan weekly throughout the month. Yes, each week, re-guess how the month will end using whatever information you gained that week, such as new orders, cancelled orders, scrap rates, product mix changes, overtime incurred, travel, etc. You will be amazed at how this process will teach you what indicators in your business really drive your profitability. It will take about 4 months (16 to 18 weeks) of this type of financial cadence before you can predict with relative accuracy on June 1st what your June financials will look like when they are published in mid July.

Down the Road

As you gain momentum with this, it will become a useful planning tool. Let’s say in the second week of the month, we have 10% of our assumed revenue for that month pushed out. We then have a few choices: build it this month anyway and ship it next month, cut overtime and wait to build it next month, try to shift other “next month” business back into this month, as well as other options. Your new planning tool will help you quantify the impact of each of those scenarios on this month’s income statement.

Even further down the road, we can start predicting quarters and then a one year plan. The one year operating plan opens whole new avenues of conversations, planning, and strategic thought that simply do not exist when we react to our business historically instead of intentionally design its future. Eventually, the three year plan will start to inform our longer term decisions like facility space, equipment needs, and capital structure requirements.

It all starts with a declaration from the CEO to establish a financial cadence based on refined prediction and not just historical views.

Mark Murphy

Mark Murphy is an Advisor to CEOs and a Vistage Group Chair serving chief executive officers throughout Orange County, California. Contact Mark Today
Copyright © 2022 - Mark Murphy