The big piece of paper that changed my business forever

People say that writing things down creates a certain kind of magic.

It must be true.  Some of the most powerful magic I’ve ever seen came from a 24″ x 36″ piece of paper and a colored marker that became my business dashboard.   After I created a business dashboard, nothing was ever the same.

If you want your business to thrive you must know – and measure – the things that make it work.   And a business dashboard that will help you measure those key business metrics seems to magically guarantee healthy business growth.  (For more on selecting “business metrics” see Key Performance Indicators “KPI”)

For extra powerful magic, I suggest you measure 7 things on your dashboard.  If you don’t know why 7 is the right number, explore the “Miller Theory” of the Magical Number 7.

OK, I don’t really know magic, but I do know finance. I’m worried about growing too fast and not having enough cash on hand for payroll, so here’s what I measure on my business dashboard:

1. Number of active customers
2. Value of Invoices Issued
3. Value of Sales Booked
4. Days of Sales Backlogged (a ratio)
5. Accounts Receivable
6. Days Receivables Outstanding (a ratio)
7. Net Cash on Hand

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But knowing what they are is not good enough.  Now you’ve got to measure them. The picture below shows how I track these 7 key business metrics.  It’s a giant XL chart taped to my door.   It’s the first thing I see when I come in to the office in the morning. And the last thing I see at night. I keep it up to date at least monthly. Having this dashboard in front of me means that I am keenly aware of what my business needs and where it is going. I know that each day I have to do something to “move the needle” and impact these numbers.

Unless you have a system to measure results, you cannot know whether your actions and decisions are helping!

Of course, my system is not perfect —  but it tells me everything I need to know to predict cash flow problems way in advance.  That’s the kind of magic you can’t do by looking at an income statement.   And in general, it tells me whether my business is growing or shrinking. I’ve discovered (and avoided) countless problems with my business by looking at this chart.

Your business metrics will be different.   If you are in a product business, you will certainly want to measure things like A/P (accounts payable) and inventory levels. If you are doing e-commerce you will want to measure your Total Visitors and your Conversion Rate. If you run a sales team, measure total number of cold calls or appointments and the close ratio. And if you feel you need to monitor all of these things, split up the task among people who can not only see the numbers, but impact them too.

Yes, every business has more variables than you can possibly measure and manage. If you can’t delegate the responsibility for the metric to the right person, then “roll them up” into something more meaningful. Add up the parts to measure the total, or divide two things to measure the ratio (like I do for Days Sales Outstanding).   If you don’t combine them you’ll end up with too many to manage. My sales numbers are a good example of a bad practice… Did you notice that my chart tracks 4 different kinds of sales? That’s way too many. To make the picture more meaningful, I should have been tracking just total invoiced sales. (See my related post on rolling up budgeting and forecasting variables.)

Want another great example? One of my favorite service companies, Bulwark Exterminating, does a regular customer satisfaction survey. That alone should be enough to impress you — these guys actually care about their service quality and their customers — but it gets better. They know that asking “are you satisfied” is not enough. That’s why Bulwark’s customer satisfaction survey measures 7 different variables on a letter grade scale (A to F).

Now THAT’s how you do it. If you want to know what your customers really think of you, ask them to rate you on 7 scales. Compare this to the one question you get at the typical grocery or retailer; “Did you find everything alright?”  Ha! Don’t try to manage your business on a customer’s answer to THAT question!  [Somewhere there is an very poor grocery store manager with a dashboard that tracks the answers to that one question.]

But wait, there’s more! There’s another dimension to this: regularity. I measure my cash flow each month (sometimes each week). Bulwark surveys its clients each and every quarter. I get a survey in the mail from Bulwark like clockwork. (This level of regularity reflects their commitment to great operational consistency!). Why is regularity important?

It’s the regularity and measurement over time that makes your dashboard magic work. Take another look at my door chart. Month to month, my numbers bounce around wildly. But over the course of the whole year, they stay within a range. Now I can compare any one month’s results to the overall range and trend.

Was August a great sales month for me? You bet! But knowing that July and September were both way below average told me that August was a fluke and not a trend. My business did not suddenly triple in August, but two or three months of sales happened to close at the same time. Unless I measure each and every month, I could not possibly know this, and I would have made some terrible decisions as a result.

When you are ready to develop your own dashboard, contact me for my dashboard template.  Drop me a note in the comments below and I’ll email it to you no charge.  You can even schedule a free consultation, and together we will find the 7 things that drive your business. No obligation — I just like doing this stuff!

Once you have your own dashboard you can monitor, measure and respond with regularity!  That’s when the magic will really start. 

Leave me a comment below and I’ll email you the XL file I used to create mine!

PS: UPDATE, SEPTEMBER 2011 — I still love the paper dashboard, but I’ve got my eyes on new web-based applications that take QuickBooks data and crunch it into some really nice looking, and MEANINGFUL, charts.  If you use one of these electronic dashboards, please tell me which one in the comments below!  Let us all know what you think of it.  Thanks!

Dedicated to your (carefully measured) profits,
David