While it has gotten so much easier to get monthly financial statements using off-the-shelf accounting software, these numbers are not all that is needed to effectively manage a business.
First, the income statement, balance sheet and cash flow statement are all based on historic data. They tell you where you have been, but not necessarily where you are headed. A professor from the east coast tells of an exercise he uses to bring this point home. He takes his students to a big open parking lot, where an old car sits with all of its windows blackened out with paper except the rear window.
He sets up a simple course to follow with orange cones. The trick is this. His students must navigate the orange cones driving forward by looking only through their rearview mirror. The cars careen all over the lot as the students try to master this almost impossible task.
The moral of this lesson is to illustrate the challenge of trying to go forward while only able to look in the past.
The challenge for the entrepreneur is to develop a set of numbers that lets them see ahead for their specific businesses. These measures tend to be unique for each situation. For example, it may be the steps that are taken in the sales cycle. If measured and used to manage, these numbers can help predict future sales and improve the steps taken to secure new business.
Here are a few key steps that can assure that you have these numbers and that they are there when you need them:
– First, identify those specific activities that, when taken together, are critical for building sales and growing profitability.
Keep number of measures to the critical few that matter most. Limit to 5-8 measures to assure that managers keep focused.
– Link compensation to these performance measures, placing emphasis on quality rather than just quantity.
– Create a list of numbers you would like to see on your desk each day, each week, each month, and each quarter that will help you see where your business is headed. Focus on those numbers that are critical to guide and navigate the company to desired sales and profits objectives.
– Sit down with your bookkeeper or accountant and see what other suggestions they might have. They can add to your list, but not delete. If you need to, upgrade your information systems and staff if needed to get these numbers. Growing profitably should easily pay for these costs.
– Be Assertive. Do not accept gaps in information or unnecessary information in reports you receive. Make sure that everyone understands the importance of these numbers for the future of the business and knows the part they play in not only providing this information, but in using it to help move the business ahead. Use the key numbers to motivate your employees, so they are working with you to grow the business.
Find the key processes that help make your business grow and find a way to measure them. Don’t ever try to move your business ahead while only looking in your rearview mirror.
(Note: Some of these ideas come from a 1999 article in the Journal of Accountancy and from a 1990 article in Inc magazine).
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