Page 131 - Finance for Non-Financial Managers

Siciliano07.qxd 3/20/2003 11:23 AM Page 112
Finance for Non-Financial Managers
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Measures of Productivity
These metrics are a little different in that calculating them often
requires numbers that don’t appear on the financial statements.
They’re more operationally oriented, intended to measure the
performance of particular resources within the organization, e.g.
its employees, to see if these resources are delivering the kind
of results that will contribute to improved numbers on the
income statement and balance sheet.
Backlog of Firm Orders
In my mind, the most important metric that doesn’t come out of
the company’s general ledger is this one. It tells us how much
business the company has sold that it has yet to deliver to its
customers. There isn’t much arithmetic to this one. It comes
from the company’s order entry system, it’s represented in dol-
lars of orders, and it’s computed like this:
backlog of orders = all firm orders received
– all orders shipped and invoiced
For companies that ship product orders that take some time
to fulfill, such as most manufacturers and many distributors, this
is a crucial measure of their immediate future as well as an indi-
cator of the success of their sales team in their efforts to keep
the production capacity of the company humming. Like any
good metric, it comes with good news and bad news.
If backlog is falling over time, it means the company is not
bringing in new orders as fast as it’s filling the ones it had. A
trend like that cannot continue indefinitely or the company will
eventually have no orders to fill. It means either the Production
Department is super efficient or the Sales Department is not.
Neither is a good thing, even if the company is ringing up nice
sales at the time while it ships all those orders leaving the ship-
ping dock.
If backlog is rising over time, that could be either good news
or bad news. If Sales is bringing in orders so fast that Production
can’t fill them, customers will be unhappy and the company