A part of any information feedback loop is the operating control reports in business. Depending on the nature and financial impact involved, these reports can be daily (Daily Operating Controls or DOC), weekly (Weekly Operating Controls or WOC) and/or monthly (Monthly Operating Controls or MOC) in management reporting. Their value is to inform management of business activity and identify any potential issues that could generate undue financial harm on the business or worse, create an unsafe product or work environment. The most common types are found in production but they exist in all areas of the business activities. The sections below describe the different types of reports in regards to the major areas of business and illustrate the value the report brings to an owner of a small business operation.
Most business owners want to at least see the financial statements each month. Financial statements are a form of an operating report. This report generally falls into the MOC group. However, many owners are really concerned about the cash flow from week to week. So some form of receivables is prepared and a payables report is provided to identify the most likely collections in the upcoming week along with any minimum required outflow of cash. This is an example of a WOC (Weekly Operating Control). Daily operating control reports for the accounting department include cash reconciliations, cash position, and cash needs for that day.
In the human resources department, regular reports include payroll reports, usually WOC’s and timesheets which can be a DOC. Other types of reports include benefit issues such as accrued time off or accumulated sick time etc. These types of reports are continuous in nature.
Other examples include to-do lists with upcoming obligations from legal compliance to license inspections and so on. This type of information should be reviewed monthly and depending on the importance of the issue, this may need to be reviewed weekly.
It is in production where operating control reports are the most valuable. Depending on the nature of your business, the frequency of the reports can impact the financial outcome. If you produce widgets in a production line, you may need to increase the frequency of the reports to aid in making the best production decisions. Imagine a brewery; a single hour of downtime in the production line could cost thousands of dollars. The value of a more frequent report that identifies the critical elements or steps in that production and can pinpoint any problems is instrumental in keeping production going. Sometimes it is as simple as checking pressure gauges or counters to confirm the production is within tolerances. These measurements are recorded for future reference and engineering tweaking to increase production.
Other operating control reports include measuring sales of certain lines of product or models against the goals for a certain period of time. In many dealerships (Auto, RV, Marine) they use a weekly control report to identify certain product lines and the goal for sales of that line. I’ve seen whiteboards with the respective salesman’s names in rows and how many units they currently have sold for that period of time towards the dealership’s goal.
In construction, contractor’s use the draw schedule as a control report. It helps them to understand what percentage of the project is complete and the draw schedule identifies the next step in the construction of the project.
The 3% Rule
This rule is based on the human eye. The eye can detect physical change of 3% or more for the average person. Less than 3% the brain will not detect the change unless there is an increase in focus on the subject matter.
This is how analog meters work. A good example is the gas gauge in your car. In analog, you can’t detect a distinctive change unless the needle moves more than 3%. However, you could concentrate on the needle and detect less than this amount but you risk an accident.
The key in production is to have a budget (another type of control report). The budget identifies the target to achieve within a time period and the progress towards that goal. It is important that the data points occur with enough frequency so as any lapse in monitoring doesn’t create a full failure in achieving the goal. A reasonable goal measurement frequency is 3%. The following is an example:
In a service based operation such as home health care, the organization has 31 nurse aides out in the field rendering around 32 hours each per week (some are full time while others are part time). With adjustments for sick, vacation, holidays etc. the company needs to bill 774 hours per week to meet budget. Since the work week is a full seven days, divided into four shifts per day, the most likely shift outcome will be 28 hours of billable time. The 3% rule calculates a frequency of at least 23 billable hours. Therefore, every shift has a bearing on the outcome of the budget each week. If any single shift was incapable of reaching its goal, an alarm should be sent to management so the issue can be rectified immediately (within one more shift). This means that those nurse aides on call or some nurse from a prior shift may have to work overtime to stay on budget.
Same situation as above, except the business operation uses 12% as the frequency measurement. Now any change in billable time in excess of 3 shifts of work would trigger an alarm to management. The key to the frequency issue is ‘Would a reduction in billable time of 93 hours (774 * 12%) be difficult to make up within the budgeted week’? I would think it would be difficult to make up that much billable time in such a limited budgeted period of one week.
Marketing & Advertising
For those businesses driven by the importance of sales, control reports can assist in identifying different marketing programs or advertising programs and the corresponding success these programs achieve.
Every small business owner should have a revenue target for the year and this should be broken out into the shorter accounting cycles. From there, the revenue targets can be recalculated to units of sales. From here, management should have enough experience to formulate the number of leads or customers that walk in to the business to achieve that level of sales. Based on this, you can create an advertising or marketing campaign (See The Difference Between Marketing and Advertising for an understanding of the difference between these two terms) to funnel customers to the product.
Don’t forget, some items are seasonal in nature. The following is an example of a control report used in sales of a seasonal line of products:
I provided accounting services to a pool and hot tub retail store. They sold supplies and serviced private pools. It turns out from management’s experience that the first day of 80 degrees or higher in the late spring generated a significant increase in walk-ins for pool cleaning and startup supplies. Management was always unprepared for the demand because of the guessing game as to when that day would arrive.
To solve the problem, the accounting retail program was converted to include product lines and count; products were then categorized into certain groupings including the pool startup and cleaning. The customer was asked only one question at checkout: What zip code is your residence?
In the first year, a graph of sales was generated to illustrate the demand load for the required product and a timeline was fashioned. The next step was to research the weather patterns for that month for the last 70 years. Sure enough a pattern developed identifying the third week of May whereby there was in increase in temperature with regularity. With the information provided, management identified the single zip code generating more than 60% of total sales associated with startup and cleaning supplies.
In year two, it was agreed to continue this monitoring and in addition, a sales insert was included in the newspaper for the targeted zip code about two weeks before the typical weather pattern change. Sure enough, once that month was over, sales had increased in this one line alone by over 40% over the prior year. The control report consisted of two sub reports: One was the weather pattern report and the other was the sales information report for that product line and the customer zip code analysis.
Remember, the key reason control reports exist is to generate feedback to management. Management uses this information to make changes. It is important to understand that good information needs to go into the reports for the greatest chance that management will make the best decision(s). However, poor information into the report creates an environment of guessing or just flat out making poor decisions. There is a remote possibility that management will make a good decision from poor information, but highly unlikely to be that fortunate.
By using operating control reports in business, management has a feedback loop that allows for maximum profitability and a quality product for the customer. Knowledge is Power.
If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org. I would love to hear from you.
Other articles with a similar subject matter that you may find helpful include:
Production: Where the Rubber Meets the Road – explains the importance of producing over all other elements of business.
Find the Bottleneck – use the most knowledgeable person in the company to identify issues that slow production.
Operate Within Your Range of Production – this article explains that sometimes increasing production comes at a great cost.
Throughput: Business Definition and Identification – a scientific explanation of the definition of throughput. It covers the elements of throughput and how to identify throughput issues in your company.