It was Warren Buffet who said that if you don’t know the score you can’t tell the winners from the losers. In sports it’s easy because the scoreboard displays the score in real-time. Sometimes the scoreboard has very few metrics (like in football) or more (like in cricket) when it takes a little bit longer to work out who is winning.
Yet very few businesses have a visible scorecard which is updated in real time. Indeed many businesses don’t know the score until long after the game is over, as my old boss used to say, when the accountants arrive after the year end to bayonet the wounded.
There used to some excuses: bank statements and supplier invoices arrived in the mail and transactions had to be entered manually into the books. Even so, enlightened business owners were able to produce a scorecard – which we used to call their management accounts – either monthly or at least quarterly.
Things have changed dramatically in the past few years; modern accounting software generates a wealth of financial information and by linking your books to live feeds from your bank accounts and recording supplier invoice and bills via data capture apps you can stay on top of your numbers on a daily basis.
The business scorecard has also moved on significantly from the management accounts of the past that probably extended, at best, to a profit and loss account and balance sheet and if you were lucky a cash flow statement.
There is now so much management and financial information available that business owners need to decide which of the myriad of metrics and data they need to know and when.
Hence there are now three types of reports which business owners should receive:
- Vital signs: there are two, or at the most, three metrics that will measure the health of a business, a bit like the measurements your doctor will take to assess your vital signs. However, unlike your medical vital signs they will differ for every business. For one of my clients it is the number of customers she has and her gross margin, for an appointment based business it may be the number of appointments booked and the average conversion of each appointment to a sale. These metrics will be quick to calculate and enable rapid action to be taken to fix any adverse signs.
- Scorecard (or dashboard): your weekly scorecard is a bit like your car’s dashboard. Everything you need to know at a glance (ideally on one page) to enable you to take corrective action on adverse variances.
There are some strict rules for your scorecard: there should be no more that 10-12 metrics all of which need a target against which to be measured. They should be trackable weekly and shown for a 13 week rolling period. Input as well as output measures should be included.
Examples of a scorecard for a B2B business might include:
- No of LinkedIn connections
- Discovery calls held
- Net new clients
- Monthly sales and gross margin
- Net operating cash flow
- Debtor days
- Cash conversion cycle
- Cash cover (the number of days outgoings covered by cash on hand)
- Marketing spend and return on investment.
- Management accounts pack: your monthly management accounts pack is a more detailed document (probably 15-20 pages) with a one-page executive summary. Again, there are some strict rules for its preparation: it should be available within 5 working days of the month end, all the financial statements should show the budgets against which they are being measured and every ‘report’ must have an owner within the senior management team.
A typical management accounts pack will contain:
- Executive summary
- Cash flow statement (preferably on the direct method)
- Profit and loss account for the month and year to date
- Sales analysis and gross margin by customer and/or product
- Unit economics (profit or loss per order after variable costs)
- Balance sheets for the last six months
- Aged receivable and payables
- Stock analysis (if any)
- Headcount sheet
- Taxes due summary
- Monthly marketing tracker
- Customer lifetime value (CLV) to customer acquisition costs (CAC) ratio
- Cost of customer acquisition by marketing channel
- Cash flow forecast.
Not every business will need such a comprehensive management accounts pack, but this represents the gold standard to aim for. Fortunately with modern accounting software able to generate a wealth of information, much of the heavy lifting to produce these metrics can be automated.
Go ahead and test yourself: as a professional business owner how many of these metrics do you receive on a weekly and monthly basis?