Help Clients Take Measure: CPAs Can Use Performance Measurement to Become More Complete Business Advisers

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EXECUTIVE SUMMARY

* PERFORMANCE MEASUREMENT (PM) IDENTIFIES, monitors and improves those business activities that affect a company's profitability. The method uses both leading (future) and lagging (past) indicators to assess how well a business is meeting its targets in the present.

* THE SEVEN ESSENTIAL STEPS FOR A PM system are: Prepare a strategic plan, identify the CSFs, determine the CSF measures, establish measurement standards, collect data and monitor results, make necessary operating revisions and reward success.

* WHEN EMPLOYEES WORK WITH MANAGEMENT to pick critical success factors, all groups better understand how goals are met. Performance measures allow employees to see clearly what management cares about and the results it wants.

* CSF MEASURES SHOULD BE IN terms of volume, time and/or quality. They should be capable of being assessed weekly or even daily. Choose measurement standards that are realistic to keep the PM process healthy.

* A CPA WHO NOTES AND COMPARES weekly production figures with an industry benchmark during an audit or other engagement has spotted an opportunity to offer PM. Companies employ performance measures to manage risk as well as internal operations.

* CPA EXPERTISE INCLUDES PM SKILL SETS--the know-how to measure an entity's performance and design systems that reliably capture and report that information. As more companies find value in using PM systems, CPAs will be well positioned to assist in their design and implementation.

CPAs and financial managers face a greater burden than ever to evaluate business performance accurately and in real time. Instead of using end-of-period reports to see how a company is doing--an inherently slow process--CPAs can help clients and employers monitor ongoing productivity and financial strength by using performance measurement (PM) to track key activities, make decisions faster and attain goals-in a more controlled and targeted manner. It's a system many companies are turning to, and some CPAs see such engagements as a natural extension of the work they already do for their clients. Here's how it works.

IT'S NOT A CRYSTAL BALL, BUT ...

The goal of PM is to identify, monitor and improve business activities that have a direct impact on a company's profitability. The method uses both leading (future) and lagging (past) indicators to assess how well a business is meeting production and profit targets. Depending on the type of business, relevant "critical success factors" (CSFs; "key performance indicators" is an equivalent term) might include customer satisfaction, employee turnover, quality, time to market and/or other operational efficiencies. They indicate what's likely to happen to a company--both good and bad--in current and future periods.

The previous-period results CPAs traditionally look at (net income, earnings per share and revenue per employee, for example) are essential data, but they provide little insight about what's down the road. "If a company's net income increased from $10 million to $15 million last year, does that help me as an investor, or as a banker looking to approve a loan, feel comfortable that similar increases will occur next year?" asks Erik Skie, CPA, a principal at Larson Allen Weishair & Co. LLP. "Not necessarily." However, if investors or bankers learn the company not only increased its net income but also improved employee morale and decreased its employee turnover rate (or customer surveys revealed an increasingly satisfied clientele), they can better gauge its investment potential. In this case, well-trained and retained employees and satisfied customers suggest the organization is likely to continue its success.

SEVEN STEPS

"There are seven essential steps for implementing a performance measurement system," says William O'Brien, CPA, a California-based financial management consultant. …

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