Common Traps of Financial Performance Measurement. Are you falling for them?

Financial performance measurement helps a company monitor its business health and define a road-map for its future. To properly evaluate this, one should find relevant measures, qualitative as well as quantitative. It is necessary to look beyond this year’s budget, adopt the right metrics for measurement and to make sure that the measures are more futuristic and forward looking.

The common traps that professionals tend to fall for while measuring financial performance are;

  • Gaming the metrics – Sometimes, good performance is only on paper and the reality may be quite different. It is difficult to completely avoid the gaming of metrics, as someone who has learned how to doctor a metric without actually having to perform will often do just that. To create an effective system, you have to work with the facts rather than resort to wishful thinking and denial. Gaming the metrics can be minimized by varying the boundaries of measurement.
  • Not benchmarking against the best – While it’s necessary to measure yourself against past performance and goals, it is also important to look at how well you are doing against competition. Go beyond your company’s data and gather benchmark data that helps you assess how well you fare against these benchmarks.
  • Not forward looking – While you should look at your historical performance, do not disproportionately delve on it. Bear in mind that historical numbers or estimates are not always indicative of your future performance. It should take into account the business plan for the coming years. While it is important to show sequential improvement in performance, you should look at how current decisions will help you in the coming months. Try to focus on measures that lead, rather than lag revenue and profit.
  • Not reassessing periodically – Numbers are meaningless if they are either not accurate or are not relevant to your goals. It is important to use the right metrics for your business, rather than going with the popular ones. Be precise about what you want to assess and explicit about what metrics are helping you with assessing it.

It’s easy to spot the need for change and improvement after things have gone wrong. But can you evaluate your measures before they fail you? The finance function and line function should coordinate in such a way that allows the company to benefit from both the relative independence of the former and the expertise of the latter.

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