There are hundreds of ways to look our business – we can spend hours staring at financial statements and ratios. But financial statements alone won’t help us make progress…what an entrepreneur really needs is a map.
A great “business dashboard” can be that map, showing us not just where we are, but also where we are going. (Financial statements tell us only where we’ve already been!)
Like the dashboard in a car, a business dashboard is a tool that tells us how things are going. If we are worried about the engine overheating, we have a temperature gauge. If we want to know whether we are likely to get a speeding ticket, we glance at the speedometer. All the car’s vital systems can be displayed on the dashboard – oil, water, gasoline, rpm, distance and even the direction of travel. A well-constructed business dashboard can likewise tell us a great deal about the function and health of our business.
Business Dashboard Basics
A dashboard is the perfect way to report financial and operational results over time. There’s no need to spend thousands on complex dashboard software, a simple dashboard can be nothing more than a couple of bar charts. The point of a great dashboard is not to introduce complexity or confusion, but rather to show the key metrics in a business and how those metrics change over time.
Make Your Dashboard a TIGER
There are five rules to creating a great dashboard, which are easy to remember with the word TIGER:
- Time – update regularly & show all results over several time periods
- Impact – the metrics must impact (and be impacted by) management decisions
- Goals – compare results to a stated business goal or objective
- Ease – pick metrics that are easy to measure and easy to understand
- Relationships – show multiple metrics in a way that makes their relationship obvious
A great dashboard should be simple, easy to read and capture only the most important and controllable metrics of a business. It must also show how these metrics change over time and how they are related to each other. Remember the word TIGER: Time, Impact, Goals, Ease, Relationships.
Want an example?
Every dashboard starts with knowing what to measure. But what is important in a business may not be obvious at first, even to the entrepreneur. It’s easy to say “sales” (and every owner’s dashboard should track sales!) but let’s go deeper. What is the real “engine” of sales? An online retailer’s sales engine is far different from that at a lumber mill or real estate office. Different business models have different key ingredients.
- The online retailer can only sell when people come to the website, so the key metrics might be traffic, number of ads running, or click-through rate.
- The lumber mill can sell as much wood as they can cut, so the key to sales might be the tons of wood processed or the board-feet produced.
- The real estate brokerage makes money when sales close, but that is driven by the number of homes under contract, or total value of pending transactions.
Start a dashboard by identifying the underlying drivers of sales, then we can measure and monitor those operational items that we can actual impact or control through careful management. Plotting “sales” is important, but not all that helpful by itself. A business that drives sales should observe and record the factors that result in sales as well as the sales themselves.
When we correctly identify both the key drivers of sales and measure sales, we get a nice bonus – the ratio of the two. For example, the real estate broker may track number of houses under contract, and commissions earned. By calculating and tracking the ratio of these two numbers (dollars earned / houses contracted), she can get a feel for how fast houses are closing, how efficient her agents are at finding buyers, and how much her houses are selling for. Tracking each of those specific numbers every month would be arduous. By tracking just the ratio of houses to dollars, the experienced broker can spot trends or anomalies which can direct further investigation. (See September in the image? Wow! What happened?)
By identifying key drivers, the results, and the ratio between them, we will have a crystal clear map of where we are and where we’re going.
Dedicated to your (TIGER-powered) profits, David
PS: This is a tiny excerpt from my upcoming book, “Entrepreneur’s Guide to Financial Statements”. It sounds like a boring title, but I promise, the book is packed with easy-to-understand examples and actionable advice. (Like the TIGER above!) Watch for the book, which is due in September 2013 from Praeger Press. I’ll make it available here, and on Amazon!