I need to preface what I am about to say with the disclaimer that I think every business should have a dashboard that outlines the key business metrics every business should measure, with some customization by industry and company, in a timely and accurate fashion.  I take no issue with the concept of dashboards – in fact, I fully endorse it.  My issue is related to programs and tools that are built to fulfill the dashboard function and how they are deployed.  Most dashboard programs and tools are totally ineffective and fall far short of the sales pitch that caused them to be purchased in the first place.  Why?  Here are the two main reasons, as well as my suggestion for how to get the most value out of the “dashboarding” process.

1. WE DON’T KNOW WHAT WE NEED TO KNOW

Regardless of how well you think you know your business, your model, or your key metrics, I guarantee you will not get the needs of your dashboard right the first time.  An inevitable part of the “dashboarding” process is you quickly learn what information is helpful and what information is not.  It also forces you to ask additional questions that leads to better and more effective metrics.  The challenge with most SaaS and off-the-shelf “dashboarding” programs is that they all require time, effort, and energy to set them up so they will work.  It is hard to make any changes without feeling like you have to start all over again.  Yes, I hope there will be some dashboard companies that will dispute this statement, but I have yet to see any of them fulfill on the commitment that the dashboards are easy to change once they get up and working.

2. THE INFORMATION IS NOT ACCURATE OR TIMELY

Once you know what you need to track, the next challenge is getting the information into the dashboard in a timely and accurate manner.  Most dashboards pull data from the accounting or ERP system the businesses uses, and that information is usually only updated and reconciled monthly, and that information is usually not completely accurate until the 10th of the following month or later.  The purpose of the dashboard is to get real-time feedback, so 10 days late is the equivalent of a year late in dashboard time.  If the information is not right, then the dashboard will not be right, which will lead to bad decisions.  If it is not timely (meaning pretty much real-time), it is useless.

THE SOLUTION

The solution to these challenges is really quite simple, but it takes a little thought, discipline, and effort.  Here are the steps to get an effective dashboard up and running for your company:

First, don’t buy a dashboard.  This step needs to wait – remember, software does not solve problems.  People and intelligence solve problems, then software automates and simplifies the solution.

Second, make a list of what you think will be important to track each week.  There should be key metrics from marketing, sales, operations, and finance on your list.

Third, create and excel spreadsheet, or a google doc spreadsheet for those of you living in the cloud, and list each of the things you want to track across the top to create several columns.  Then, list the Friday of each of the following 52 weeks down the left-hand column titled “Week Ending.”

Fourth, coordinate with your team where all of the information will come from for this document.  It may need to come from several people, so commit them to get the information to you on time and in the format that will work best for you.

Fifth, start tracking for four weeks and see what everyone thinks.  What information do they like?  What information do they still wish they had.  Then repeat this process for the next three months.

Sixth, once you feel you have your list of items you want on your dashboard pretty well-defined, start to investigate the best ways to automate the collection of this information into your weekly dashboard.  The information will likely come from many different software application, including your accounting system, your CRM, and more.

Seven, start to investigate dashboard SaaS tools based on their ability to pull data from all of your sources (which may include some manual input).

Eight, purchase a dashboard that solves the highest number of issues in terms of automation, timeliness, and accuracy.

Nine, spend the time and resources it takes to get your new system set up the right way.

Ten, sit back and enjoy the fruits of your labors with the critical information you need to run your business right at your fingertips.

I could give countless examples of the benefits that companies reap when they have the right information on time.  The point of this blog post is that business owners should refrain from making any type of “dashboarding” purpose until they get to step 8 of this process.  If you don’t wait, you will likely end up with the wrong solution giving you inaccurate information that will be useless and waste the company’s resources in terms of the procurement, set-up, training, implementation, and ongoing support.

*Author’s Note: Please note that for the purposes of this post I chose to step out on a liberal limb and turn dashboard, which is usually only used as noun, into the verb “dashboarding.”  I have surrounded each occurrence of this with quotation marks as a sign that I realize “dashboarding” is not a word, but it helps me communicate my point.  Thanks for understanding!

WORKING CAPITAL DOES NOT EQUAL CASH

Working capital is often misunderstood for cash.  Working capital is the difference between all of your current assets (cash, accounts receivable, etc.) and your current liabilities (accounts payable, accrued expenses, etc.).  Notice that cash is actually only a part of this equation, and it is usually a smaller part at that.  So, what in the world is working capital?

The easiest way to explain it is in terms of the number of days difference between when you pay for things and when you get paid.  Here is a simplified example:

Cash goes out to pay for parts and labor to build a widget.  After 10 days the widget is ready to be sold.  It takes another 20 days to sell the widget to a customer on credit (net 30 terms).  The customer pays early – in 25 days.  The total working capital cycle is 55 days.  Hence, the business needs to have enough “working capital” to fund this transaction until it gets paid. 

WORKING CAPITAL IS A CYCLE OF CASH FLOW

Based on the example above, a business will need a certain amount of “working capital” to handle this 55-day cycle.  But what if the company can improve its manufacturing process and get paid a little earlier, reducing its working capital days to 42?  This means the company would need less working capital to fund its operations.  Since most people confuse working capital for cash, we think a bigger number is better.  But companies that run an efficient working capital cycle require lower working capital, the sign of a well-run and efficient business.

HOW SHOULD WORKING CAPITAL BE MEASURED?

There are lots of measurements that comprise working capital - days sales outstanding, inventory days, payables days, and more.  Trying to look at all of these and make sense of the company’s working capital progress is tough.  So, we use a ratio that measures working capital days – one number to illuminate the entire working capital cycle.  This puts the number into context and makes it easy to initially spot issues and challenges.

Very simply, the formula for working capital days is:

(Average working capital for a period/sales for the period)*(# of days in the period)

If I told you that you have a working capital balance of $500,000, it would be hard to understand if that was good or bad until you compare it to other periods of time in your business.  If you are growing or shrinking, it becomes more difficult to know if your working capital cycle is accelerating or decelerating, or if you are squeezing more or less cash out of your operations.  Here is a quick application of a real company’s working capital days:

HOW SHOULD WORKING CAPITAL BE FINANCED?

Financing working capital is actually quite simple once we understand the working captal days ratio.  At a company’s maximum efficiency, there is a minimum number of days in its working capital cycle – maybe it is 15 days, or maybe it is 60 days.  Regardless of the number, this part of working capital should usually be funded with permanent debt or equity. 

I have yet to see a business that can function at their most efficient working capital cycle for very long.  This is caused by spikes and drops in sales as well as new opportunities and new challenges that often arise daily.  The days in the working capital cycle above this most efficient level are usually best financed with lines of credit or other revolving debt facilities.  Sometimes it is financed with retained earnings or equity, but that may not be the most effective use of the firm’s capital.

CONCLUSION

Working capital is a measure of the firm’s ability to streamline its operations to generate cash as quickly as possible.  When understood in this light, less is actually more.  Our CFO services help companies get their arms around this concept and maximize their cash flow.  Business is, ultimately, about cash generation.  The working capital cycle of a business can either gobble up more than its fair share of cash or it can be managed as an efficient cash flow system.  If managed, it can become one of the company’s most significant competitive advantages.

AUTHOR’S NOTE: This discussion assumes that the company keeps a target balance of cash and cash equivalents and either invests the rest into fixed assets or growth or distributes cash in excess of the target balance to owners or other operating entities.  Target cash is frequently set at between 2-4% of annualized revenue, with many exceptions based on industry, growth/shrinkage rate,and several other factors.

Remember you and your employees are in business not busyness. Busy work is not the work of business. Doing the wrong things well helps no one. So responsibly doing busy work is worthless.

So what is the answer? We all need to be held to account to do the work that needs to be done. And that is what accountability is all about. Accountability occurs when managers specify what they want subordinates to produce (quantity, quality, time and resources), judge how well the subordinate worked and thereby manage the employees. A manager may be reluctant to have the hard conversation, but part of the manager’s job is to ensure that  employees are being productive.  Human beings are of course social animals.  So management must never tolerate or allow bad behavior to be rewarded; think of it as a moral issue for management.  No retailer would ever think of using an open cash draw instead of a cash register.  An open cash draw rewards bad behavior.

Beyond the individual, most work is done in teams. Again, almost all employees strive to be a part of a winning team. The main inhibitors of teams are unclear work processes, bad incentives, unclear decision making, bad communications and/or lack of knowledge of how the rest of the firm works.  Almost all of the problems and issues happen at the margin or transitions–the handoffs, decision points, approval points etc. If you really want to improve employee performance, look at what happens between the teams. Now as the financial crisis on Wall Street shows, the bad incentives can really mess up ever the most profitable business. Well done financials can, of course point the way.  This is one of the focal point of the CFO services we deliver to our clients.

Fix the process, particularly the incentives and many employee problems take care of themselves.  FedEx is a good example. Here is what Charles Munger, Warren Buffett’s partner said…”the Federal Express system requires that all packages be shifted rapidly among airplanes in one central airport each night. And the system has no integrity for the customers if the night work shift can’t accomplish its assignment fast…”  Federal Express could not get the night shift to get the packages out on time.  “They tried moral persuasion. They tried everything in the world without luck. And, finally, somebody got the happy thought that it was foolish to pay the night shift by the hour when what the employer wanted was not maximized billable hours of employee service but fault-free, rapid performance of a particular task. Maybe, this person thought, if they paid the employees per shift and let all night shift employees go home when all the planes were loaded, the system would work better. And, lo and behold, that solution worked.”  (from an article “The Psychology of Human Misjudgment”).

The tightening credit markets have only accentuated the problem as most businesses are not able to rely on traditional banks for to finance their working capital – which is defined as the difference between the time a business needs to pay its payables and the the time it takes to collects from its customers.

We subscribe to and teach the Pleasant Nuisance Theory.  In its simplicity, it uses consistent yet pleasant messaging to be just annoying enough but pleasant and professional enough to ensure that we are first in line to receive any payments being sent by our customers.  Here is more detail on how it works (we will assume that all customers in this example are invoices on a net 30 basis).

First, someone in the firm needs to fill the role of “pleasant nuisance.”  This individual needs to devote a specific amount of time every week to contacting customers that owe money.  Sometimes 1 or 2 hours is all it takes.  The entrepreneurs, founders, CEO, and anyone involved in sales and marketing should NEVER fill this role.

Second, the “pleasant nuisance” should contact every customer within 15 days of when the customer receives an invoice from the company.  The call (yes, an actual phone call, which should not be confused with an email, text message, tweet, or status update on FaceBook) should go something like this: “Tammy, this is Steve with the XYZ Company.  I wanted to thank you again for paying our last invoice so promptly.  Also, I was calling to make sure that you received our invoice #15224 dated June 1st.  Have you seen it yet?”  If Tammy says yes, then respond with something like this: “Great.  Thanks for confirming that.  Do you have any questions or concerns with it?”  If she says no, then say something like this: “Oh, I would have thought you would have it by now.  May I email or fax it to you right now?”

The third step comes with a phone call within about 1-10 of the invoices due date.  The call may go someting like this: “Tammy, this is Steve from XYZ Company.  We discussed invoice #15524 a little while ago and you were able to confirm receipt of that invoice with you at that time.  Are there any concerns or hesitations with paying it by its due date next week, June 30th?”

I hope you can sense the pleasant part of this process.  It isn’t really much of a nuisance.

Fourth, if we call have not received the payment on the due date, we might have a phone call like this: “Tammy, this is Steve.  Today is the due date for invoice #15224 and we have not yet received payment – we were expecting it today.  Could you confirm that the payment has been issued to us?  What date was the check mailed?”

If the customer does not confirm payment, then we step up our pleasant nuisance efforts by seeking commitments and then holding them to those commitments.  Our leverage points may be finance charges, late fees, or termination of their credit terms altogether.  We’ll save those parts of the pleasant nuisance theory for a future blog post.

Conclusion – you will be surprised that two things happen.  First, you will start getting paid on-time and sometimes even early more often.  Second, you will train the AP clerk or accountant at your customer to expect your follow-up and want to give you good news each time you call.  You may even establish a good relationship with them!  It is likely that any CFO, part-time CFO, CFO consultant, or business finance consultant would agree that implementing the Pleasant Nuisance Theory is among the best practices for collections.

The examples of employee theft and embezzlement are far too many to cite.  But most of us have heard at least one horror story.  I met the owner of a company yesterday who had an employee embezzle over $1,000,000 from the company.  And this employee was an upright member of the community known for being honest.  So how did this happen?

It starts with a company that gives more and more control in the accounting and finance functions of the firm to just one person.  Phrases like: “I would trust him with my life,” and “I know I can trust him – he is honest and loyal to me,” become the basis for giving more and more control.  The challenge is that the more control someone has, the greater the temptation becomes to steal because no one is looking and no one will notice.

As the temptation grows for the employee, he or she begins to have more of an entitlement mentality towards the employer.  Thoughts like: “I deserve to take this from the company because I’ve been working overtime for six months with no extra pay or bonus.”  I was once part of terminating an employee who had stolen fuel from our company.  His response was that he had worked some overtime and, instead of putting it on his time sheet he thought he would just make up for it by taking a little fuel.  Again, entitlement begins to creep in.

Once the employee gets away with a little theft, it can become addicting.  They become so entrenched in the lies they are living they begin to distance themselves from reality with overwhelming justifications for their behavior.

So, how does a small to medium-sized business owner avoid this problem?  First, please know that there are many people who are dis-honest and will try to steal from you no matter what controls you put in place.  With that as a disclaimer, you should consider some of these suggestions as low-cost alternatives to trusting just one person with all of the controls:

1. Consider separating the activities of creating invoices, receiving payments, applying payments, opening bank statements, and reconciling bank statements between at least two people.  Even if you need to have someone work a couple of hours a month on a couple of these functions, it could be well worth it
2. Regularly audit your customer and vendor list to validate they are real
3. Regularly audit payroll by verifying the existence and value added by all employees
4. If you or your employees handle cash, put systems in place to hold those employees accountable for every penny they touch.

These are just a few suggestions, and there are many more.  By establishing the right controls in your business in a cost-effective manner, you will be taking steps that will help protect you, your company, and your employees.

One additional thought – I recently met a business owner who installed security cameras in his business in very visible locations.  He never hooked them up, and the cameras never actually recorded any video.  But the theft of time and inventory by his employees dropped to almost nothing.  With the cameras acting as “big brother,” the employees were incentivized to remain honest.  Sometimes an outside CFO consultant or a part-time CFO can be the “big brother” that helps keep honest people honest.