Accounting transactions have historically recorded only past events. But what about the future? How can you make your company’s accounting and finance function be a forward-looking asset? Two often overlooked areas that provide future insight for a business are making use of KPIs and projections.
One way to create a forward-looking function is to develop and track key performance indicators (KPIs). A good set of KPIs gives a finance department a real-time report card on the business’s performance and developing trends. KPIs should consist of the half dozen most important drivers to the business. This could mean tracking anything from the turns on inventory or particular product lines in a distribution business to the average revenue per person in a more service-oriented environment.
The insight from your KPIs will allow you to identify trends that are developing within your business and assess your performance against your industry. By contrast, companies without KPIs very often evaluate their performance based upon their relative level of sales and the balance in their bank account – measurements that don’t really tell the full story of your company’s future potential.
Another area to assist in creating a more outward looking finance department is to build or make use of projections or projection software. Projections are commonly used to assist in budgeting or planning for larger reinvestments into a business. These projections can help a finance group pinpoint an expected return on an investment, and also allow them to track how that investment is performing relative to those expectations.
Take for instance the opportunity to acquire a service or product that is complementary to your existing operation. After sufficiently vetting the prospective target and obtaining an understanding of its expected cash flows, you commit to paying a price. Before taking on new debt or deploying precious capital, a projection model would be helpful in evaluating not only the potential upside of the acquisition, but also the potential impact to the operations of the existing business if the target under-performs.
Making progress in these two areas over time will turn your finance function from a recorder of history to a Nostradamus of your company’s future!
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