With a two-year old in the house, the word “Dada” is often heard from the waking hours to reading Jimmy Fallen’s book before bed. Recently, I heard on a podcast the word used as an acronym for Data, Analysis, Decision, Actions, and how useful such process can be for entrepreneurs and executives while operating their business.
The following will go through each process and common pitfalls of these items with a focus on accounting and finance along with explanations on how critical each is to the next.
Gathering information from the activities of a business is critical to any operations. Too often we see entrepreneurs using sales orders from their business development team or the amount of cash in the bank to evaluate the health of their business. However, there is more information to be considered including the complete cost of products or services sold, uncollected sales, general overhead expenses, warranty claims, obsolete inventory, and many others.
The remaining steps of the DADA process include ensuring the ability to obtain complete and accurate data from either your accounting system or other systems used. The phrase “garbage in – garbage out” is very appropriate to this step. It is important to ensure that your accounting and finance team have the technology and processes in place to enter the necessary information and produce usable reports. Some questions to ask yourself:
Am I receiving reports on a timely basis or do I have to wait over a month before seeing results of my operations?
The monthly close process should be no longer than 20 days following the previous month end. If the close process is longer than this, it may be due to a lack of appropriate processes or opportunities to introduce technology to accelerate the timing.
Am I often hearing that certain reports are not able to be prepared or the information is not available?
In today’s age there is a plethora of technology available to manage data to produce necessary reports. You may need to reconsider the technology in place and identify new options. With the vast amounts of technologies out there, it is becoming harder for the accounting and finance teams to understand all of the capabilities. The technology in place may be more capable than you realize.
Am I constantly finding incorrect information in reports?
Incorrect information could arise from a number of potential issues. Poor data entry methods can cause regular errors. For example, does someone enter all cash activity into the accounting system rather than uploading a report directly from the bank? Weak internal controls, including lack of a review process, can be the culprit of inaccurate information provided to executives. Consider whether you have the right number of individuals in the accounting process.
When Signature Analytics engages with a company, one of the first areas we focus on is how the data is entered, the processes in place (or lack thereof), and the reports that may be produced. From this assessment, we can identify suggestions for improvement.
Assuming that you are confident in the data received, the next stage in the process is to analyze the results and identify areas of concern or positive trends impacting the business. While a balance sheet and income statement are good starts to this process, there are other metric-based reports which should be utilized. Below are several examples of key performance indicators to consider:
Gross margin trending by product line/department
Having a strong grasp on the margins of your product or service can help identify when your pricing needs to be adjusted, potential bottlenecks in the process, or if suppliers’ cost adjustments are impacting your profitability.
Break even report
Knowing exactly what you need to sell each month to break even from a net income perspective can help business owners make critical decisions on sales team commission plans, adding additional headcount, approving larger purchases, amongst others.
Days sales outstanding trending
While sales get the business excited, it’s collecting on those sales that is most critical. Evaluating how long it takes your customers to pay, and whether that time period is extending or contracting over time, can help identify future cash flow issues.
Cash conversion cycle
From the day you send payment to suppliers for inventory to the day you ultimately collect from your customers for selling that same piece of inventory, do you know how long it takes? Many businesses do not consider this analysis and are surprised when they learn it takes 6 months to get their cash back. This could be an indicator of poor inventory management, a lack of focus on collections, or a need to review terms with customers and suppliers.
Analysis should be performed on a consistent monthly basis and discussed with the accounting/finance team as well as the operations team. Occasionally we see that analysis meetings focus on exceptions or “one-time” activities in the data. The team should first determine if these are exceptions or if there is an underlying issue in the operations. If they are exceptions, then this data should be excluded from the analysis so that a true picture of the results of operations can be reviewed.
The main purpose of the analysis process is to make decisions about the business. Identifying that the company is experiencing collections issues is important, but there needs to be decisions agreed upon to help improve the situation. Decisions by the team should contain enough detail so that the operations team can clearly understand any changes which need to be implemented. Prior to finalizing decisions, the team may need to go back to the Data stage and obtain additional information to confirm that it is the best course of action. Once a decision is agreed upon, it should be treated similarly to how goals are developed using the SMART acronym; specific, measurable, achievable, relevant, and time-based. This can provide the greatest chance of success and help move the business in the right direction as quickly as possible.
The Data, Analysis, and Decision steps can be an exhausting process and once those processes are completed, everyone may feel enthusiastic about the new direction and conclusions. However, the process isn’t complete.
Decisions on their own do not trigger change within a business; it requires action throughout the organization to create impact. Action plans should be communicated to those affected by the decision along with support for each decision. When team members believe change is occurring solely for the sake of change, they are much less receptive than when they understand the issue. It’s important to set clear expectations for teams to follow, as well as an understanding that members will be held accountable for implementing such actions.
The results of these actions should be evaluated each month to measure progress. This evaluation involves going through the Data and Analysis process again. If more decisions need to be made, then that is the time to do so. One common pitfall we see with businesses is that they go through the process to develop an action plan, then are focused on something different the next month, disrupting progress. Make sure that your monthly agenda discussions include updates on previous decisions made.
Going through the DADA process consistently with your accounting and finance team is a critical part of the monthly close process. If you aren’t currently implementing the DADA process to operate your business, it is time to consider whether you have roadblocks preventing the process.
At Signature Analytics, our team has helped companies improve their overall processes, improving insight into the operations and resulting in necessary changes to allow for growth and success. How would fractional leadership help your growing business?
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