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!”
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.