Selecting the Proper Finance Metrics for Your Organization
There is a plethora of metrics available for the interested manager, but the proper selection, especially of finance metrics, is necessary to avoid being overwhelmed by too much data.
Finance may seem, to many, a dry, uninteresting field focused only on counting pennies and subtracting expenses from profits. However, it is actually a vital endeavor that keeps all organizations, big and small, liquid and with enough resources, to perform their various functions. To this end, many managers use so-called finance metrics to be better able to monitor and improve their organization’s financial condition.
Metrics are, simply put, various quantities whose values can be measured and also reflect some particular aspect of an organization’s performance. For instance, such quantities as gross sales, net profit, transportation expenses, employee satisfaction rate, customer retention ratio, are some sample metrics. As can be expected, there are very many possible metrics corresponding to the various aspects and complex workings of organizations.
Because of this, it is reasonable to expect that some combinations of metrics would prove to be just right for an organization’s needs. That is, some proper subset of all these possible quantities would be just right to describe an organization and help its managers focus on what needs to be improved for best effect. However, coming up with this right set of measures does take some planning and analysis.
With the great number of choices, a manager might be overwhelmed by the prospect of implementing a system making use of these metrics. Many novice managers often make the mistake of trying to take on too many of these data points at once, and not being able to form any clear picture. The key to using metrics properly is to limit measurement only to those few that are most relevant, thus simplifying not only the collection of data but also its interpretation.
In most cases, this is done by first building a strategic framework. This framework consists of the most general goals of the organization along with more specific sub-goals and objectives. So, the first step would be to formulate a definitive mission, which is a statement of what the company as a whole should be striving to do. Following this mission then, the smaller objectives can then be formulated. This will help to ensure that each component and department of the organization will have goals that are well aligned with the overall mission.
With this framework in hand, the balanced scorecard approach may then be planned. This approach is a strategic management tool that has become relatively established over the years it has been in existence. It consists of metrics falling under four different aspects of performance, which are the customer, growth & development, business processes, and financial perspectives. The exact balance amongst these four different categories would depend on the exact nature and condition of the organization in question.
Finance metrics would deal with tracking and evaluating the flow and growth of cash and assets of the company through time. Even when just considering this subset of all possible metrics, there are still a lot of choices to be made in terms of deciding which ones are most relevant. However, the time taken to do so will surely be worth it.
