Get in the habit of producing good financial reports every single month. But you need more than just standard financial reports. You need a Management Dashboard that monitors critical metrics that may not pop out of your accounting reports. These monthly reports are a learning opportunity: What did we think would happen? What actually happened? Why was there a difference? Are we on track to hit our key milestones?
So now we’re moving to the top of the startup finance pyramid, monitoring your performance. That includes your monthly financial reports as well as your management dashboard. So first let’s talk about your monthly financials. I want to encourage you to get out ahead of your board of directors and your investors and get into the habit of producing good monthly financial reports every single month. I’ll tell you, that differentiates you from almost every other entrepreneur. Typically what happens is the entrepreneur is resisting, as much as possible. The entrepreneur is resisting all of this reporting that the board requires. Entrepreneurs hate doing these monthly financial reports because for the most part, we treat them the wrong way. Entrepreneurs, directors, investors, they tend to treat the monthly financial reports as a score card. It’s a grade, it’s all about how are you doing. Are you living up to your promise? You should really be thinking about your monthly reports as a learning opportunity. As a way to identify what did we think was going to happen, what actually happened, and why was there a difference. We can learn by paying attention to those differences rather than taking the monthly financial report as an opportunity to either praise an entrepreneur who beat his numbers, or punish the entrepreneur who missed his numbers.
What you’re going to discover is your monthly financials are not good enough. Because it doesn’t really capture everything you really care about when you’re building your company. So in addition to your monthly financial reports, you also need to build a management dashboard. A management dashboard is a set of metrics, sometimes they are referred to as key performance indicators, that you want to monitor on a regular basis. So for example, cash, cash is almost always one of your key performance indicators. Where is your cash? And equally important, is it above or below where you thought it was supposed to be? I would generally recommend you to try to keep your management dashboard to 12 to 15 key performance indicators. That’s two or three for each part of your company that you report on as a group every month. So you know, for product development you’ll have two or three. For marketing, for sales, for operations, for finance. Sometimes you’re going to be monitoring these on a daily basis. Sometimes on a weekly basis. And always on a monthly basis.
Your management dashboard is generally on one piece of paper or on one screen. It shows each of the key performance indicators that you want to monitor on a regular basis. Now there are a whole bunch of different ways to do it. Start simple. You can do it in a power point slide. You can do it on an Excel spreadsheet, whatever is the easiest way to report these key performance indicators. If you can from early days identify one of those critical metrics that we really want to follow and then you show them to investors that, hey, we already have this management dashboard, investors are going to be really impressed. So I encourage you, get out ahead of the curve. Put together an effective management dashboard. Monitoring the key performance indicators for your company. If you have a disciplined financial management approach to your company, you will separate yourself from almost all the other startup entrepreneurs that are out there.
Berman, Karen and Joe Knight. 2008. Financial Intelligence for Entrepreneurs: What You Really Need to Know About the Numbers. Harvard Business Press.
Questions for You
What did we think would happen last month? What actually happened? Why was there a difference?
Can we tell if we are on track to hit our critical milestones?
Is the team set up to succeed?
Are we measuring and monitoring the right things?
What adjustments do we need to make to get on track?
Tools and exercises
Put together a Management Dashboard with 12 to 15 key performance indicators that tell you whether or not you are on track.
Create a monthly financial report. Every month.
Have each group in the company identify five to ten key performance indicators for their activities and milestones.
Review your Dashboard each quarter to make sure you are measuring and monitoring the right things.