Don't keep looking over your shoulder

Feb 1, 2004 12:00 PM, by I. Gregg Van Wert

One of the great pieces of advice I've been given over the years is this: Relying solely on financial statements to run a business is like driving a car by looking only in the rearview mirror. Assembling accurate monthly and year-end statements is a fundamental that printer CEOs have down pat. The problem is old news won't help you save a bad month. To do that, you need information about what is happening, as it is happening.

Some call them Hot Sheets, some call them Flash Reports. Regardless of the name, the concept is best summarized in this exec's words: “With so much information to keep track of, getting my most critical business indicators on one page is an absolute necessity. If I can't detect troubling or potentially profitable trends until after the close of the month, I'm losing 30 to 60 days of opportunity.”

Information management

The value of understanding timely information often comes as an epiphany — mine came during the development of NAPL's (Paramus, NJ) ProfitXL series of financial computer models. Early on we determined that a series of dashboard indicators was needed to free busy execs from the piles of detailed reports they collect but rarely find time to use. We identified a “critical few” that, if assembled and tracked in a disciplined manner, will tell you what's really occurring in your day-to-day business. These markers should form the foundation of every company's information management process.

Tracking vital statistics

Quotes generated
This list tracks the number of quotes generated and their dollar value. Keeping a steady eye on these numbers will tell you whether quoting activity is ahead or behind for the month. Relate your cumulative number of quotes to your standing kill ratio and you'll know whether your manufacturing pipeline is likely to be full, or whether steps need to be taken quickly to stimulate additional sales.
Jobs booked
Tracking the number, dollar value and value-added relating to booked jobs alerts you to where your company stands in reaching breakeven for the month. This is significant information, since greater pricing flexibility can be applied once you break even. The value-added component is vital — with the addition of fulfillment, database management and other value-adds, the dynamics of breakeven are changing. Shifts in product mix and their associated buy-outs affect how quickly a company will cover its monthly “nut.” Since fixed operating costs are covered solely by the value-added portion of sales, understanding this number is crucial to your success (and peace of mind).
Month-to-date invoicing
This is perhaps the most frequently overlooked, yet most important, indicator of a company's financial health. Is it possible to bill a job within three days of completion? Yes! Well-run companies do, and with discipline, any company can. Relentless attention to this daily indicator will keep pressure on reducing the costly time lag between shipping and billing.
Savings and loan
Current cash balance
Let's be clear about this. You're lending money. Your “loans” are in the form of labor, materials and supplies you have tied up in work-in-process. Your cash-on-hand indicator measures how much you've collected from the customers you're “invested” in. It indicates whether your collection efforts are working, whether you'll have the cash to meet tomorrow's operating costs and whether your aged receivables may be an issue for your credit provider.
Cash conversion cycle
Knowing your cash conversion cycle to the minute helps you understand how much of your cost of capital is tied up in cash management. How long does it take a dollar invested in work in process to convert back to a dollar of cash? This calculation will tell you whether your cash-to-cash cycle is expanding or contracting.
Overtime paid
This figure reveals a lot about plant efficiency, particularly if it is tied to operating standards and chargeable time. Is overtime really squeezing out additional revenue? Or is overtime being worked because the plant is under-performing?

Business by numbers

These daily indicators make the greatest impact on a CEO's ability to manage information and adjust “on the fly.” Simply assembling a daily Hot Sheet or Flash Report, however, is of little value unless the process is applied relentlessly.

For one of my clients, the daily Flash Report forms the centerpiece of an 8 a.m. meeting with his CFO, manufacturing head and vice president of sales. “Understanding the relationships between the numbers is just as important as the numbers themselves,” he says.

To purchase ProfitXL, contact NAPL. It integrates easily with all major MIS programs. Through its use you'll spend less time looking over your shoulder, and more time focusing on what's awaiting you on the road ahead.

I. Gregg Van Wert is founding principal of The Haven Group consulting firm. Contact him at ivangpr@aol.com.