Financial cardinals needed

Of the many financial measures available, only three qualify as financial cardinals – the ones whose alarm bells must ring to prompt action in good time

They are total revenue, total cost and profitability

They’re ‘catch-all’ measures covering all outputs, outcomes and inputs:

  • Total revenue covers net outputs sold and outcomes the customers took into account before making their purchases
  • Total cost covers the mix of costly input resources used
  • Profitability covers how well those input resources were used – a ‘total productivity’ measure in effect

 

Trends in each one need to be regularly monitored

In the private sector, the three must be monitored together – otherwise managers might be tempted to make themselves look good by boosting one at the expense of another

For instance, senior managers have been known to buy other companies to boost their revenue and profits growth record – however, their capital employed will also have increased so profitability, not profits, may well have fallen

In the public sector, there’s only one financial cardinal – total cost

Overall, if something goes wrong, it may not show up in the financial cardinals – minor failures can be cancelled out by minor successes when results are aggregated

But, if something goes badly wrong ‘below decks’, it should be noticed not only by the manager responsible but also his peers – transparency and honesty between them all are key

And once understood, quick action will be vital – hence, financial cardinals must always be presented in good time, not months later as many are

To quote Dr Devi Shetty, chairman of the Narayana Cardiac Hospital in India: “If you get the profit and loss at the end of the month, it’s a post mortem, the patient is dead – if you get the profit and loss daily, it’s a diagnosis and you can treat”

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