Tuesday, August 11, 2009
Early Warning Signs, Part I

Early Warning Signs are simply financial measurements and ratios. The numbers that make up the measurements and ratios come mostly from current accounting system reports. These measurements and ratios are extracted regularly and graphed; the trend line is monitored over time. The curve is either moving up, flattening out or heading downward.


The challenge for 21st century management teams is to know the status of each critical measurement.

Managers say to me, “You know, there’s more to our company than the numbers.” Of course, there is. When relied on exclusively, managing by the numbers provides an incomplete picture.

But proactive management does start with the numbers and is mindful of when to look beyond them. Some of the reasons to look beyond the numbers are:

1. Hindsight is 20/20. It is easier to see the advent of decline after the fact than to predict it.

2. A decline in one measurement, or
    A decline over a specific period of time, or
    A decline of a specific size		     does not, in and of itself,
mean that the organization
is in danger.


3. Financial statements are snapshots of earlier periods and are lagging indicators. Management needs timely information and cannot wait for quarterly or even monthly financial data.

Imperfect as they are, here is the bottom line on early warning signs and other performance measures:

Management has a fiduciary responsibility to owners and stakeholders to be “vigilant and use a proactive approach rather than be complacent and rely on crisis-based reaction.” (Weitzel and Jonssen, 1989)

See Early Warning Signs, Part II, for some commonly used indicators.