A financial dashboard is an important tool for business entrepreneurs. The dashboard provides a quick overview of critical metrics that summarize the health of a business.
Standard ratios derived from financial statements serve as the foundation of most dashboards. However, relying only on financial statement data means the entrepreneur is managing the business using numbers based on past performance.
Lessons from a Parking Lot
Many years ago, an entrepreneurship professor shared an exercise he used with students to teach them the limitations of relying only on historic data in their financial dashboards.
He would have his students meet him in a commuter parking lot on campus on a Saturday morning (when the lot was empty). When they arrived, there was their professor standing next to an old car.
The professor set up a simple course for the students to drive using orange cones. When the first student got into the car, he realized that the professor had blacked-out the front windshield and side windows. He was told he must drive the assigned course going forward.
“But I can’t see where I’m going!?”
“You can only use your rearview mirror,” said the professor.
The result was hilarious. Student after student careened through the parking lot, driving over cones along their path. Most thought their professor had gone mad.
Eventually, one of the students would understand the point of the lesson.
“This has to do with financial dashboards, doesn’t it. We don’t know where we are going because we can only see where we’ve been!”
Lesson learned.
Finding Ways to See Where the Business is Headed
Although I have never actually used this exercise with entrepreneurs I work with, I do often share this story. I challenge entrepreneurs to find ways to “tear away the black paper” so they can see the road ahead for their businesses.
I give them an example from our healthcare business. We monitored various metrics related to inquiries and referrals, which proved to be good predictors of future revenues and helped us time the hiring of new staff more effectively.
My rule of thumb is that no more than half of the metrics on a financial dashboard should come from historic financial statement data. The rest should be specific numbers for the business that indicate where it is headed.
So glad I found this post! Keep it up.
I love the story about the students not being able to drive with only their windshield. While funny, it does have a lot of truth behind it. Historical numbers are just that–from the past–and with the speed at which the world changes now, it would be incredibly difficult to only rely on past numbers.
This is a great post because it is so thought provoking. The old car with the blacked out front window becomes more significant in a time when most cars are equipped with a backup camera and some are even able to operate independently of a driver.
This story provides a good analogy to business planning. While looking at historic data provides some insight into where you are, your actions will be much more informed if you even have some glimpse of what’s in front of you, as well as the macro and competitive forces beside you.
I really enjoyed this post about using historic data. It is really funny that it that it took that professors students time to realize they were not doing this for fun and that this is highlighting what you do when you use only historical data.
This article shows a story that is a great way to start planning for a business. I love how is saying throughout the financial dashboard there should a historic data sheet for the people to really show where it is and where it’s going to head in the future. In the future you need new numbers, because you can’t go off old content everything should refresh but also have it for the data.
What a great use of imagery to get the point across. I think often times it is easy to say that history will inform the future and in some ways it does. But it is also important to look at the present and the future itself to see where you are going. There is only so much you can gain by looking in the rearview mirror.
Another dashboard comparison that I have heard is about an airplane dashboard, and how every little thing means something but only someone who understands it all well enough can glance at it and know what every little piece is about. While this post is talking more about the idea of looking forward rather than only backwards, I think that this other metaphor is also related, because in addition to looking forward you need to understand where all of your information is going, where you have gotten it from, and what it means. Without this expertise you’ll still just be driving — or flying — blindly.
I think this exercise is funny. Could you image a college professor doing this today and getting away with it? It is hard to look ahead when the only thing you have is your past. The easiest way to create a dashboard based on your history. It is important to take into consideration all factors that affect your financial dashboard.