The Small Business Dashboard
Check EngineWhat the . . .
Check Engine
What do you want me to check?
Check Engine
All right! All right!
The foregoing was an actual conversation I had with a dashboard recently. The reason for my exclamations was because I didn't know what those words-of-warning were telling me. Did I have an immediate problem, or a just potential problem? Is it the oil? The coolant? The ignition? Darn it, "Check engine" could mean lots of things.
Well, looks like the oil level is fine. Hmm, what if a small business had an instrument panel - like a car? What would it look like?
In The Good Old Days
Way back, when I first started driving, a car's instrument panel had gauges that indicated the condition of the engine's critical elements by the relative position of a needle on each gauge. Low-tech simplicity made gauges completely accurate. And operationally, they were extremely effective because you could watch the needles move and take action before any damage or unsafe condition occurred.
The coolant is okay. Wonder what that light means? Hmm! Small business gauges - with needles.
Too Much High-Tech?
Designing an instrument panel can't be a very exciting job; I mean, how many different ways can you arrange gauges. Years ago, no doubt to fight off boredom, automobile dashboard designers decided to replace gauges and concocting a bunch of lights and flashing words to get the attention of the operator. But the challenge with these newfangled indicators is that the operator only sees there is a problem when . . . there IS a problem.
Hmm! Isn't that kind of like a lot of small business operators?
Here's a trick question: If your business were an automobile, would the instrument panel have gauges with needles that you can monitor as they move? Or would it have flashing indicators that tell you nothing until it's potentially too late, or a warning with no specific information?
The correct answer is: My business actually has gauges. They're called financial statements and operating ratios. If you didn't answer that way, you are probably operating with flashing indicators, which is to say, you don't manage with financial statements, and therefore, don't know you have a problem until there is one.
Let's take a look at what two different small business instrument panels might look like - one with warning lights and one with gauges.
Inventory
Flashing light: Warning - Check Inventory. If you're operating with an inventory flashing indicator, by the time you see this light 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 want today.
Gauge: If you're using a gauge, you saw inventory totals begin to creep up the first month the increase showed up on the balance sheet. You may have been tipped off first by the way the increase impacted your gross profit on your P&L. When you checked, you noticed that you also had a potential problem with two items that had been "A" items (fast moving) last season, but now one has become a "C" and one a "D" item (seldom sold). Since you were watching your gauges, you were able to alert your purchasing people to change the stocking levels for those items.
Inventory is cash you can't spend until you convert it by making a sale. With cash so critical to your small business, can you afford to wait for a light to flash before you make inventory management decisions?
Payroll
Flashing light: Caution - High payroll. If your small business instrument panel has a payroll light, it will only tell you that you might be spending too much on people. But by the time you see this light, you may have already agreed to pay two new employees more than you can justify, and yourself too large a bonus.
Gauge: If you've got a payroll gauge on the P&L side of your dashboard, the needle overlays the payroll-to-sales ratio, which is referenced against the national payroll averages you know your industry pays for sales, administrative, labor, and management. Adjusted, of course, for your geography and any special market conditions.
For most small businesses, payroll is the largest expense on the P&L. Knowing that, do you want to manage the movement of a needle or wait for a light to come on?
Cash Flow
Flashing light: Urgent - No Cash. Your cash flow warning light could come on when you don't have the cash to buy the goods you need to meet sales demand. Or it could come on when there isn't enough cash to cover the payroll checks. How could that be? You're profitable. Sales are up. Why is that #&%@ light coming on? Should you borrow more money?
Gauge: As you scan the Balance Sheet side of your panel, if you are using a cash flow gauge, it will indicate Accounts Receivable levels are creeping up. By quickly identifying aging accounts that were using you as a bank, you can clean up that problem with some collection activity. The needle on this gauge is also pointing to your working capital ratios, which indicates that you could be moving toward an imbalance between short and long-term debt. This gauge also helped you decide to finance the new truck instead of paying cash.
Cash is king. Period! Are you going to trust it to some light, or to a gauge that tells you what's really going on?
Growth
Flashing light: Danger - Excessive speed. This light only comes on when the pistons on your company have reached redline operating levels. By that time, either your internal systems will be shot, or you will have grown yourself right out of business, or both.
Gauge: If you have a growth gauge on your small business dash, it will display a line on the sales growth scale beyond which you shouldn't go with your current ratio of equity, debt and retained earnings. This gauge was especially handy last year when you were thinking about paying yourself a bonus. By leaving those funds in the company as retained earnings, you were able to add a nice piece of business without increasing your line of credit. And this year, with profits down a little, you can either grow by using the strength of your balance sheet at the bank to increase the credit line, or choose not to grow until you can fund it with more profits than you currently are producing.
If your future depends on the growth decisions you make, don't you need the accuracy and immediacy of a gauge with a needle?
Gauges Are Our Friends
Of course, there are many other operating elements that you must manage in your business. But with these four you get the idea that you should install gauges in your small business instrument panel, not warning lights.
Have you ever wondered why the gas indicators still show incremental changes? Why wouldn't it just tell you when you are about to run out of gas, like the other lights do? Because you need to know the progress of your fuel consumption based on the trip you are taking and availability of resources. It's the same with your business.
In business, your gauges are the numbers found on your financial statements, and the ratios they produce. Like the needles in the gauges on a car's instrument panel, when produced accurately and checked regularly, these numbers will typically move in small increments, which show you trends. And astute operators not only notice the movement of their operating gauges, but they understand the cause-and-effect each one has on the others.
Write this on a rock... Make sure you operate your business with gauges, not warning lights. It's the only way to tell if your decisions are producing positive or negative results.
