Financial results: painted by numbers

CEOs need to look beyond numbers to properly manage their businesses.
Financial results such as cash flow, sales and earnings are traditionally viewed
as the principal measures of performance but they don’t reveal everything.

According to a Deloitte survey, 78% of the CEOs and board members questioned
admit that financial indicators alone do not adequately capture their company’s
strengths and weaknesses.

They don’t deal with progress relative to customer requirements or
competitors, they often inform too late that something is amiss, and they may
not capture long-term benefits from decisions made at that time. They may not
even be the most significant measures to some industries whose drivers of
success are based on intangible assets.

One would think that non-financial indicators such as customer satisfaction,
innovation, and employee commitment would be high on the list of what CEOs are
paying attention to. This is not so.

There is a critical disconnect between rhetoric and reality in some of the
world’s leading companies. The attitudes of CEOs towards monitoring and
measuring the performance of underlying drivers of success are more positive,
compared to the last Deloitte survey in 2004.

There is increasing pressure to measure non-financial data, and CEOs are
including this in annual reports, shareholder briefings, and compensation
structures. They recognise non-intangibles are key drivers of success. But they
are not prepared to take the next step and act.

So what’s the problem? CEOs admitted that the quality of this non-financial
performance information is the root of the problem, because they are inadequate
to meet their needs. While 87% of senior executives describe their ability to
track financial performance as excellent or good, just 29% felt the same about
their ability to monitor non-financial factors. Tracking soft issues is viewed
as more art than science, while tracking financial metrics is more familiar and
quantifiable.

CEOs understand that a balanced mix of financial and non-financial objectives
could improve performance and ultimately financial results – but more needs to
be done. Business leaders need to demystify the role of numbers to pave a path
for these new tools.

Robert Go is global managing director of industry practices at Deloitte
Touche Tohmatsu