Business Management Systems – Critical to Long-term Success

What Are Business Management Systems?

Business management systems (BMS) are all the policies, procedures, internal controls, and tools – manual and computerized – used in conducting business and measuring the results.  BMS encompasses all functional activities — from accounting to sales and marketing to product development and research to general administrative tasks.

A strong BMS infrastructure enables a business to do more with less demand on its resource.  Wisely designed systems which are adapted or customized to fit the operational structures, strategies, and financial capabilities mean that an organization can capture results of past and decisions and facilitate future decisions by understanding cause and result relationships.

Any organization that has strong business management systems has a competitive advantage through its ability to understand profitability and cost drivers, as well as mechanisms for measuring results at various operational points (product, business line, market, and so on).  Information is critical – timely, relevant, reliable information is a competitive difference.

What elements make up a business management system?

• Accurate and complete historical accounting and financial statement information
• Performance management processes
• Strategic planning
• Budget and forecast mechanism
  • Capital expenditure analysis, budgets, and management
  • Cash flow management
• Established priorities that align operations
  • Coordinated functional activities
  • Infrastructure that facilitates activity and doesn’t constrain operations
• Business risk analysis and management programs

If your organization has yet to formalize any of its management processes, then the list above can seem intimidating.  It isn’t, however, an all-or-nothing list.  The typical business starts with a few elements, learns to do them well and then implements additional tools.

If you are starting from scratch, the best place to begin is in getting reliable accounting data on your past and current performance.  Underlying every other aspect of BMS is the ability to generate information on your actions.  That information is quantified in your financial reporting.

Once you have comprehensive accounting information, then it is time to develop analytical tools that provide signals and meaning to the information.  These tools enable you to know where your business is effective — making money, and where it is not being effective — draining your organization of cash.  One of these primary tools is cash flow analysis. This tool is the dashboard for managing your cash – being able to meet your immediate and near – term payment obligations.

Taking your accounting information from historical to future is the next step; this begins with establishing budgets for the business as whole and for the components.  The budget then serves as a comparison for forecasting.  The business establishes a plan for what money is expected and how it will be used.  Normally, the budget and forecasting processes are integrated into the strategic planning process and establishing a strategic plan would precede any forecast or budget process.

Many times you will see forecasting and budgeting as interchangeable terms.  There are distinct differences.  Budgets are control mechanisms used to demonstrate a plan of allocation of resources across projects, departments, and activities.  These plans evolve from the strategic plan and the specific organizational objectives identified to quantify the overall desired outcome.  Since strategic plans are multiple year plans (typically three to five years), these plans are quantified by forecasting economic conditions, pricing, size of markets, market share, pricing, volumes, and the infrastructure (people, equipment, and so on) that will be needed to pursue the objectives.

Forecasting is about orienting the business to future performance and estimating based on reasonable assumptions, economic factors, past performance, competitive information, and many other factors.  Forecasting is about the expected outcomes the business will be able to achieve pursuing its market strategies and executing day-to-day and near term tactics.  Budgeting converts the first year of a strategic forecast into a tool for managing performance and assessing how things are going.  Once a budget period (typically an operating cycle, fiscal, or calendar year) is underway, actual performance is compared to expectation and the variance between expected results and actual are reported and analyzed for cause.  A business may then choose to incorporate the new information learned from actual performance and generate a new forecast for the budget year, thus moving the performance targets.  The business then has two comparators – the original budget and the rolling forecast.  (A third comparator is often used – historical results for the prior comparable timeframe.)

Businesses without strategic planning experience often find beginning a budget and forecast cycle for the current business financial year beneficial before making the move to strategic planning.  The benefit stems from gaining an understanding of the variables that impact the business – internally and externally, before they try to identify and select new strategies and objectives.  Knowing where they are and where they have come from enables the organization to assess realistically the business potential and the possible strategies the business is capable of executing, the resources that will be needed, and the “typical” results based upon the current structure and planned changes in the organization.

The best strategic plans, budgets, and forecasts do nothing for an organization which does not require results and performance.  Requiring results and performance demands accountability throughout the organization.  Accountability requires that members must understand the role, activities, priorities, and measurable objectives/results they are expected to deliver.  This means the organization must have a means to identify, set, communicate, and measure specific results across all levels of the organization – individually and as a whole.  The rewards and consequences of underperforming must also be clear and consistently applied.  Organizations often become caught in the trap of setting performance standards, then not

• Enforcing them
• Rewarding correct behaviors
• Extinguishing incorrect behaviors
• Relating results to rewards
• Matching the actions (correct or incorrect) to the rewards or consequences at the time of occurrence – waiting too long to communicate
• Viewing corrective actions and consequences as “cold” and “impersonal”
• Avoiding dealing with performance issues
• Burdening good performers with an unequal share of the load by not dealing with underperformers

Establishing an objective performance measurement system enables your organization to succeed.

Finally, if you are in business there are risks.  There can be risks to tangible assets, property, or equipment; there can be risks of infringement on intellectual property rights; there can be risks from manmade and natural disasters.  If you lack a well-designed human resource process, there can be risks associated with employment practices – recruiting, promotions, compensation, and so on.  There are liabilities associated with making and delivering a product or service.  Every business has risks. Some are common to most businesses; others may be unique to an industry, geographic area, or other factors.

Some risks can be reduced through processes, procedures, and policies.  Some cannot.  Some risks can be reduced by diversifying the business operations.  Other risks can be reduced by segregating operations and activities.

There will however always be some degree of risk that a business cannot eliminate.  These risks can be addressed in part through insurance.  A business’ risk analysis should encompass physical assets, transportation activities (travel, commercial vehicles, etc.), financial risks (business interruption, investment, and so on), and transactional losses (inventory, tax liability, fraud, theft, etc.).  A comprehensive understanding of your source of risk enables you to make strategic and tactical decisions regarding the amount of protection needed and how to insure against those potential disasters.  Commercial insurance policies range from general liability to business interruption and many, many others.  Talking to an insurance professional is time well spent in understanding the insurance products, limitations, and options available.  You still won’t be 100% covered against risk – that is an unattainable goal, but you can hedge against risk with the operational and financial controls coupled with the right mix of insurance products.

Business management systems are all about the business – its structures, resources, opportunities, tools, and people.  Every aspect of business activity falls within the scope of a true “system.”  It isn’t about automation or technology (although it can include both).  It is about integrating and aligning the activities and infrastructure to be used to the greatest result.

Copyright ©2005 F.O.C.U.S. Resource, Inc.