One of the goals of management control is to define a method, i.e. a set of processes that help the entrepreneur make business decisions. These processes record and interpret the numbers that the company generates every day. In organized realities, the management control system represents the basis for building the planning and monitoring of company results.
The alternative to this method is extemporaneous management, sometimes conditioned by emotional impulses. During my professional activity, I have observed that the absence of a management control system always entails the risk of making mistakes, sometimes even serious ones. Thinking back to those dangerous situations, I made a list of mistakes to which an entrepreneur who acts without method is exposed. The list is long.
The Mistakes You Risk Making Without Management Control
Working At A Loss And Figuring It Out Late
The anxiety of bringing work home can lead the entrepreneur to make serious mistakes. Mistakes that are repeated systematically if the calculations are made only in the final balance. I have seen several companies working at a loss. There is often the idea that a loss-making product is strategic for selling another with more margin. When you don’t know the values and extent of these losses, strategy is an excuse. The truth is that the situation is out of control—a danger to be avoided like the plague.
Losing Sight Of Priorities
Managing well also means planning for the future and chartering a course. In this sense, how many SMEs make the budget? One of the advantages of preparing a budget at the beginning of the year is to measure the resources available. Once measured, resources can be divided among various business functions. Thus each of them will have them in a coherent and aligned way with the priorities and market positioning of the company.
Traveling Without A Destination
Setting concrete goals is the starting point for developing a business strategy. However, to be concrete, a plan must be chosen based on precise data and information. Without the support of a reliable control system, the first difficulty can scare us and push us to change our business objectives. Having a solid strategy, and pursuing it with determination, is the exact opposite of this.
Refrain from neglecting leftovers with the inventory value. Quarter-to-quarter changes cannot be calculated. If inventory goes up by 10, profit goes up by 10, and vice versa. Consequently, with the value of stocks, margins can be calculated. Running a business without inventory control is like traveling in a fog.
Losing Sight Of Trade Receivables
Credits are future income, the petrol in your company’s journey. Sometimes, however, they become management levers in customer relations. Being soft with takings can help turnover, but it’s a delicate lever that needs to be dosed with precision. And with awareness of one’s financial resources.
Ignore The Competitor Numbers
During a regatta, skippers observe their opponents’ sails to avoid losing the right wind. If a company knows its numbers, it can only analyze the balance sheets of its competitors. Comparing your results with your competitors means understanding, correcting, learning and improving. This operation is called benchmarking.
It Needs To Learn The Language Of Banks
If you need help understanding what language they speak in the bank, it’s a big problem too. Despite the ups and downs of recent years, banks remain an indispensable partner with whom good relations must be maintained. If a market opportunity presents itself and financial resources are needed to seize it, one must be able to communicate effectively and quickly with the credit system. In the bank, we speak a language made up mainly of numbers. It is up to the entrepreneur to adapt.
Mishandling Bank Guarantees
It often happens that the bank asks for a signature here and a signature there. But are they always all necessary? The personal guarantee is used to manage emergencies. It is a lever of access to credit that loses effectiveness if you sign even when it is not needed. So, be very careful. Getting the guarantees back once the emergency is over is necessary. To manage these situations, however, you need to have your company numbers in hand and know how to read them.
You Need To Remember That Interest Rates Can Go Up
Variable rate? No problem… at least for now, but the situation can change. Those accustomed to budgeting have learned to measure and control interest rates’ effects on business results.
Go Short On Currencies
Some time ago, I was contacted by a company that exports to the United States. The company had entered into all contracts in dollars, underestimating currency fluctuation risks. Morals? He lost a flat 15% because his costs were instead expressed in euros, a figure that did not fluctuate proportionally. Cases like this are common. Sometimes, making such mistakes means you’ve worked at a loss. When an entrepreneur closes a contract, his head is concentrated on production. However, if the procedures that cover the exchange rate risk are not triggered, the company remains exposed and can even derail.
Companionship With Partners
Differences between partners are frequent. I have even witnessed surreal discussions in which the common interest was lost. At that point, the partners stopped rowing in the same direction. When numbers are missing at the basis of business decisions, everyone can speak without fear of making a mistake. Everyone can claim to be correct. The attrition of the relationship between partners is often the result of decision-making processes needing more methods.
Confusing The Profit With The Gross Income Of The Partners
If you are one of the owners of a partnership, you know what I’m talking about. The printing of the financial statements, made by the accounting program, shows that there is a profit for the year. So you are calm and carry on serenely. It is a pity, however, that the members’ income must be subtracted from the profit, i.e. the amounts are withdrawn each month as salary. Those in the income statement are not recorded. As well as the amounts withdrawn from the corporate coffers to pay taxes and members’ contributions. After these subtractions, the operating profit changes a lot. So it’s good to learn how to do these calculations beforehand.
Overestimating The Possibilities Of Software
Software is essential. They store and process company information and data, an increasingly valuable asset. However, someone needs to enter correct and tested data and parameters to work. Purchasing new software will not solve this problem if this information is present and reliable. We need a person inside the company who has a vision of the entire corporate information system. He will provide precise indications to the programmer. If this figure still needs to exist within the company, it is necessary to train him.
Leading Your Team Instead Of Coordinating It
Gone are the days when the boss decided what to do, and everyone else did. Today we need to adapt quickly to changing situations. In such a scenario, collaborators need to have autonomy. The entrepreneur continues to decide on the goal but has yet to find a way to reach it. How to make your collaborators more independent? Sharing numbers and objectives is the most effective way to coordinate a group that actively participates in corporate life.
Extend The Leg
Investments help your business progress and grow. However, managing the various growth phases with precise financial sustainability levels is necessary. Entrepreneurial instinct is good, but it needs to be supported by tools capable of measuring and providing accurate data what a sound management control system does.
Ignoring Your Rating
The rating is the company’s report card defined on particular fees. Ignoring it means risking arriving unprepared for crucial moments, such as applying for a loan, extending a credit line, etc. Where does the rating come from? Obviously, from company data. And it is easy to calculate, provided that the entrepreneur knows and can read his business numbers from him.
Shipwrecked During The Generational Change
Two generations speak and think differently. This means that, during the passing of the baton from parent to child, the company is subjected to a jolt that can be fatal. The company is no longer managed spontaneously and personally when organized management control processes exist. As a result, entrepreneurial changes between generations are less traumatic.
Only some things are essential in the company. Or at least: only some items are equally important. Choices must be made carefully and consider both the results and those to be achieved. However, companies get lost in matters of little economic importance. Reasonable management control helps prevent these distractions and brings the focus back to the main objectives. Getting the wrong product or resell? What’s better? It depends on the numbers and convenience.
Sometimes it can be strategic to produce internally, even if the costs are higher than an outsourced production. The important thing, in such cases, is to make precise calculations and analyses. On the other hand, those who go broke, because they do not have adequate management control, risk making serious mistakes. A sound management control system means collecting, processing and analyzing company data. The numbers of a company are primarily in the balance sheet data but also in stock accounting, analytical accounting, industrial accounting and the KPIs each company decides to monitor.
Adopting a management control system means measuring and anticipating critical situations and being able to make more calibrated business decisions. The ones I told were nineteen mistakes that came back to my memory thinking about my direct experiences. If you can think of others and want to report them to me, I would be happy.