The role of the entrepreneur is to spot a trend from the least possible number of facts. To do that, you need early warning systems to detect what may be the start of a trend. First and foremost it is essential to have regular financials that deliver timely, relevant information.  

Running a business without monthly financials is like playing golf without keeping score. But numbers should be a servant not a master and even monthly financials are of little practical value if they aren’t telling you what you need to know about your business. More important than simply having monthly profit and loss numbers is building a financial dashboard of “key result indicators” that deliver key information to the CEO.  

In building a dashboard, there are four separate areas, each of which provides critical information: 

P&L Information  

The P&L statement is the rear view mirror. From the full profit and loss report, the most critical items for your business should be selected and presented by different business segments:      

Balance Sheet Information 

One of the most significant financial shortcomings of CEOs is a failure to use the relationship between the P&L and the Balance Sheet to pick up developing trends. Pick up the items that really matter – cash, receivables, payables, bank covenants etc:   

Revenue Predictors  

The financial statements show the revenue actually booked, but they should also incorporate the key performance indicators for your company. If properly identified, the key performance indicators should look behind the dollar values and integrate activity levels. In the revenues area, the performance indicators would do more than simply report revenues invoiced, but get behind the sales process to report on underlying pipeline activity and provide a forecast for what can be expected to occur based on prediction factors driven by your actual experience.

Activity Numbers 

In many businesses, the underlying activity is just at important as the revenue numbers, and looking at revenue in isolation is not enough. Look behind the numbers and identify transaction volumes, service calls, inventory expenditures and other elements that may give you early warning that margins are under pressure.