Does Your Business Use Gauges or Lights
Here's a trick question:
If your business were a car, would the dashboard instruments have gauges with needles you can monitor, or warning lights that flash with no specific information?
The correct answer is: gauges. And in your business those gauges are financial statements and operating ratios.
If you said flashing lights, that means you probably won't know your business has a problem until some damage is done.
Let's take a look at three issues on two different business dashboards ? one with warning lights and one with gauges.
Inventory light - Warning! Check Inventory! If you're operating with an inventory light, by the time it flashes, your inventory is not only too high, but also poorly distributed across your lines. You may have lots of stuff on the shelf and in the warehouse, but not enough of what customers are buying now.
Inventory gauge - With a balance sheet inventory gauge, when you see inventory creeping up in any month, you can immediately adjust stocking levels to get them back in line.
Inventory is cash you can't spend until a customer pays for it. With cash so tight, can you wait for a light to flash before you make inventory decisions?
Payroll light - Caution! High payroll! If your instrument panel has a payroll light it will only flash when payroll expense is already too high. By then, you may have made payroll commitments you can't justify, and/or paid yourself a large bonus.
Payroll gauge - The needle on the payroll gauge identifies the payroll-to-sales ratio, including a breakdown of how much you should pay sales, management, production, etc.
Payroll is usually your largest operating expense. Do you want to manage it with the incremental movement of a needle, or wait for a light to come on?
Growth light - Danger! Excessive speed! This light only comes on when your company's working capital pistons have reached redline operating levels. By that time, either your internal systems will be over-extended, you will have grown yourself out of business, or both.
Growth gauge - Certain financial ratios are the growth gauges that indicate if you have the working capital required to expand, or if you should slow down until you've acquired the capital to grow successfully.
With your success depending on sound growth decisions, don't you need the incremental immediacy of a gauge?
Business gauges are the numbers on your financial statements and the ratios they produce. Like gauges on a car's instrument panel, when displayed accurately and checked regularly, they move in small increments to show positive trends, or warn you of specific impending dangers.
Astute business operators not only manage the movement of their operating gauges, but also understand the cause-and-effect relationship each gauge has with another.
Write this on a rock... Business journeys are more successful when your company's dashboard has gauges instead of warning lights.
Jim Blasingame
Small Business Expert and host of The Small Business Advocate Show
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