Business Drivers (article in progress)
By Tim Richardson, CPA and founder of GrowthPath
The main source of numerical, hard data for a business is typically from its accounting system: at least, this is what accountants tend to believe. The accounting system is great record of what happened, which is very interesting to tax authorities, but it's not very good at helping you look forwards. In fact, the only way you can use accounting information to predict the future is to look for trends and patterns in the past, and expect that they will continue into the future. This is surprisingly useful if done well, but there are big risks in expecting the future to be like the past. As well, it does not provide very fast diagnostic information when something goes wrong.
Facts vs Information
There is a big difference between a fact and information.
If information is useful, it is useful because it informs decisions you make which can influence your profit and cashflow. When management makes decision about where to allocate resources (money and people), they are choosing between different futures. Information are facts which helps make these decisions. But a lot of facts exists which don't actually help.
So we must therefore focus on things which
- management can influence
- which are important
- and which have a clear link to financial consequences (cashflow events).
We call these things Business Drivers. You should have about five to ten. Compared to visions and mission statements, you will find business drivers are much, much more effective at communicating how your business competes. Good business drivers are remarkably good at aligning people in an organisation. Since alignment is an essential part of leadership, business drivers are a powerful leadership tool.
The triumph and problem of the Profit and Loss Statement
(Americans, being optimistic, call this the Income Statement)
Ask an accountant to review a Profit and Loss statement of a business they don't know.
In less than five minutes, the accountant will start making professional observations about the business. You could choose a fish and chip shop or mining conglomerate, it won't matter. This is the triumph of traditional accounting. It compresses all the complexity of a business into a standard form, and it has hardly changed in 200 years. It makes training accountants very easy.
Now, you, a business owner, can ask the accountant some questions about growing the mystery business. Here are some good questions:
- what does this business do to win sales from competitors?
- what are the five things the business should be doing to increase sales?
- How do those five things have to change to increase sales by 10%?
- What would such an increase mean for the bank balance?
These are all decent questions to ask someone who wants to grow their business. But it is very hard to get answers from accounting reports.
That's because the Profit and Loss is not designed for business managers and decision makers. Traditional accounting is designed to help shareholders, lenders and tax authorities assess your business in a format conveniently standardised. When you have good accounting skills, you will be able to pick up the P&L of your local sandwhich shop, and make meaningful comparisons to the P&L of Macdonalds. This is the strength of traditional accounting. It is great at making businesses look very similar to each other. But it does that by obscuring nearly all of what actually makes a business different, and understanding the difference to competitors is the source of growth.
The P&L is like a quality manual hamburger: proudly the same everywhere, at the expense of taste, texture and nutrition.
What if there was a solution that you could fit to one page, let you get rid of mission statements and vision statements, and helped you get everyone in your business working together to grow the business?
If you know the concept of Key Performance Indicators, you're getting close.
A Business Driver has three essential properties.
- it must be influenceable. So the weather or GDP growth don't count.
- It must be measurable without this being an hugely expensive task.
- You must be able to estimate a numerical relationship between the Business Driver and sales.
There are also Cost Drivers, which are the same except that you need to find a numerical relationship to costs.