The Real Value of Key Performance Indicators

There is an old business maxim: “If the customer gets to the future before you do, they will leave you behind.” The point: When growth begins to falter, it’s often too late to do anything about it, because the trends that caused it to happen have accelerated faster than your ability to change.

Financial accounting systems track transactions and produce a wide variety of financial information about the operations of an organization, as well as the routine financial statements, but all this information is basically historical in nature. Managerial accounting, on the other hand, is about what that historical data indicates about current and future trends for the continued growth and profitable management of the company. The goal of managerial accounting is to develop and track the critical indicators that influence future cash flow.

For publicly traded companies, the scrutiny by market analysts is based on tracking these critical indicators, and their evaluations are often accurate predictors of the early warning signs of trends impacting the future growth and profitability of the firms they follow.

It should make you wonder as the CEO how an analyst who is not involved with a business can forecast the decline of a company sooner and more accurately than the management team can. They do it quite simply by following the obvious KPIs that aren’t being followed by the company.

LET’S EXAMINE THESE INDICATORS

• Sales performance against plan. This is the most obvious indicator. However, there are underlying causes for declines in sales that need to be analyzed as soon as a weakness is detected. Most companies explain these negative variances as “temporary aberrations,” or “due to economic fluctuations,” etc. However, these observations are often made during the same periods when competitors’ sales are increasing. Sales declines result in lower receivables, increases in inventory and lower profits, as expenses stay the same, all of which impact cash flow.

• Lower turnover of inventory. When sales continue to decrease over time, more and more cash is tied up in slow-moving inventory.

• Borrowing/using lines of credit increase. To continue to run the business, cash is needed to fund ongoing operational expenses. This increases interest expense.

• Stock valuation decreases as profits decline. Investors lose confidence in the company and sell their shares. The capitalization value of the company declines. The net result is that cash flow steadily declines, and along with it, shareholders’ confidence in the company, and the increasing vulnerability to competitors’ more attractive advantages. All of this eventually results in the inability of the management team to be able to sustain any semblance of relevance in the market place.

CASE IN POINT
RadioShack. It has been obvious to everyone since the early 2000’s that the RadioShack value concept was no longer viable due to the changing dynamics of the market for electronics brought on by the evolution of the Internet, rapid advances in technology, and the myriad of new “smart” electronic gadgets. While all of this was apparent for more than the last 10 years, management at RadioShack carried on business as usual while sales declined every year.

At the end of 2013, there were 4,300 company-owned stores with more than 23,000 associates, but with fewer and fewer customers. All of the obvious signs were evident for years. Sales declined another 14% in the current quarter, the stock dropped 47%, and its cash position and borrowing limits will run out in less than a year. Approximately 1,100 stores have been closed already, and the company has posted a $737 million loss. Share value has fallen below $1.00 a share, down from a high of $79.50 in December 1999 – the heyday of the brand.

What KPIs were managers watching during this entire period? And how could they not realize that consumers can buy everything they sell in the store for less somewhere else? I guess the board went to sleep a long time ago.

So the big question I pose to you is: “What KPIs are you watching?”