Which financial metrics can you manage?
As a finance professional, what metrics can you influence? We will explore this key question in our two-part series.
While the question may seem like an easy one at first blush, you can’t control everything that can be measured. Award-winning Lockstep explored a number of key financial metrics, asking the question, “Can this metric be managed?”
The criteria for metrics that can be “managed” is one that the finance team can directly influence by asking someone to do something differently, causing a desired change in the metric to occur. We found three different classes of accounts receivable (AR) metrics, each with its own managerial value and purpose: Business Results, AR Objectives and AR Activities.
At the highest level, AR departments are measuring what we call “Business Results.” Business Results are the metrics, such as working capital and DSO, that represent the culmination of efforts. Business Results ultimately cannot be controlled by a single person.
A second metric that emerged, while not directly manageable, could be heavily influenced, is “AR Objectives.” AR Objectives are the specific targets that an organization asks an AR department to reach, like percentage payments past due. But AR Objectives are not directly manageable either. Lowering past due payments requires consent from customers, who have their own priorities or challenges.
What finance teams can control are “AR Activities.” These are the numbers accounts receivable teams gather, such as the number of collections calls, number of emails, or number of customer conversations completed. AR Activities are the metrics that can actually be managed.
Want more calls each week? Make it happen. Want more emails sent? You can make that happen.
Business Results and AR Objectives today are the result of last month’s AR Activities. If the finance team makes more calls (an AR Activity), then it will probably reduce payments past due (an AR Objective). If payments past due is lower, a lower DSO and bigger bank balance will likely follow (Business Results).
Activity management is essential to the success of an organization as it helps to control the direction of your business and increase efficiency. For AR teams, activity management leads to a greater understanding of the team’s activity management. In part 2, we will discussion how automating your AR activities lead to improved productivity, prioritization, and ultimately performance.
With a connected accounting solution, like award-winning Lockstep, for your finance team to coordinate work with customers and vendors, you can go digital and enjoy the benefits of office automation.