(NOTE: This is a follow-up to a previous blog posts about business cash flow and money management; read the previous ones here)
In the pitch black of a cloudy, moonless night on October 2, 1996, a Boeing 757 with 70 passengers and crew took off from Lima, Peru.
Barely three minutes into the flight, the pilots recognized in horror that their basic flight instruments were behaving erratically, providing conflicting information about airspeed and altitude.
Over the Pacific Ocean without the benefit of moonlight or city lights, they had no ground reference for guidance. In the midst of the confusion, multiple alarms sounded, signaling problems with windshear (the winds were calm) and the airspeed (being both too high and too low.) Even the autopilot system was inoperative.
Back on land, the Lima control tower was unable to provide accurate, timely information about the plane’s airspeed or altitude. Before a chase plane could be dispatched to lead them to safety, the troubled plane’s left wing and engine hit the water. After the initial impact, the aircraft climbed 300 feet, inverted, and plummeted into the sea, sinking immediately with all crew and passengers aboard.
The post-crash investigation revealed that masking tape was covering the external ports that the cockpit instruments need to determine altitude and airspeed. During washing and polishing of the aircraft, a maintenance worker had placed adhesive tape over the ports and neglected to remove it. This resulted in catastrophic malfunctioning of the airspeed indicator and altimeter, which led to false and conflicting flight data. Since the control tower’s flight data came from the aircraft’s system, the tower was unable to assist the pilots effectively.
Confused, overwhelmed, and unable to properly determine their airspeed and altitude, the pilots were unaware that their plane was descending at a 10-degree angle when it first hit the water.
So what does this tragic story have to do with your business?
Think of your business as a high-performance jet, capable of flying at high speed and great altitude. After all, your business is your greatest asset and the easiest one to crash. With that metaphor in mind, you must ask yourself…
- How high and how fast are you flying? From our experience in working with hundreds of entrepreneurs and small business owners, we know there are a lot of you who are flying your ‘business jet’ without a clue as to how high and how fast you are flying. You don’t even know in what direction you are headed. As a result, you might end up in a dive, headed for the mountain. And you won’t know it until it’s too late.
- What are your fuel (cash) reserves? If you don’t know what your reserves really are, what your cash “burn rate” is, you aren’t really in control of your business.But you say, “Wait, I’ve got my book of business and good financial records.” Sure, you might know your income and expenses or your balance sheet and/or a cash flow analysis for a given time span.Yet chances are you’ve only got a part of your instrument dashboard working.
- How are your engines revving? So you say, “I know how high and how fast I’m flying. And, I know where I’m headed! Just to prove it, I’m going to rev up my engines.”Hold on a minute. Before you touch that throttle, do you have the instruments that tell you how your engines are doing?The alternative to flying your business blindfolded is having financial dials and gauges that tell you where you are and where you are headed.
What we’re talking about here is the need for a Strategic Financial Dashboard.
A Strategic Financial Dashboard is a set of metrics, or indicators, that tell you about the health and performance of your business. They are also known as key performance indicators (“KPI”).
Here are examples of a few basic indicators:
Cash Flow. Cash flow is the movement of cash into, and out of, your business. Understanding the flow of cash in your business tells you when you will have the cash available to pay bills and to pay yourself. Cash often moves out before it moves in. Cash flow projections enable you to strategize on how you will cover the gap.
Revenue (actual and projected). Revenue or sales are the income that your business generates. Historic actual revenue tracking and forward-looking projections of revenue are important indicators for planning cash flow into your business.
Expenses (actual and projected). Tracking expenses provides a means for understanding where money is going. Anticipating expenses in advance enables planning of the cash flow out of your business.
Assets = What Your Business Owns. Assets take the form of 1) cash that is immediately available, 2) things that can be converted to cash, and 3) things that make you money.
Liabilities = What Your Business Owes. Liabilities take the form of 1) money owed to others or 2) obligations for which you are responsible, such as rent or advertising.
Equity. Sometimes referred to as “Net Worth” or “Net Wealth,” equity is the difference between assets and liabilities; that portion of your business that you actually own. In a healthy business, equity is positive and growing every year.
These are just some of the key performance indicators that show the true picture of how you are doing. There are three primary financial benefits from managing via your KPIs: First, profitability goes up; second, value goes up, way up; and third, risk goes down. In addition, your confidence increases because you are dealing with information, not guesses. In turn, your presentations and presence become stronger because your self-confidence is higher. Summing up, you and your business move to a higher level of performance.
Having shared all of this information with you, we must also offer a note of warning: These key performance indicators are nothing new. But far too many entrepreneurs don’t pay attention to them or know how to track them.
And, even if you do track them, most people aren’t financial types who can interpret what they mean.
When it comes to quantifying the variables and measuring the results, there are a number of assumptions that you need to make. There are also a host of limitations and pitfalls in collecting, analyzing, and interpreting the data. Nevertheless, used properly, these measures can mean the difference between a mediocre business (or worse, a failed one) and a phenomenally successful one.
The Bottom Line on Business Financial Performance:
The airline pilot must continually refer to and measure the fundamental indicators of engine, controls, and navigational performance if he or she is to arrive safely at the desired destination. The same is true of every business.
Measuring, tracking, and analyzing fundamental metrics gives you command and control over a critical part of your business. Doing so will help you to make the best strategic decisions to maximize your revenues and profit and increase value.
After all, when it comes to flying your “business jet,” we want you to reach your destination (goals) safely and successfully.
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