Why You Need More Than Good Books to Run a Successful Business. Accounting is limited.
Accounting is the universal language of business. Every entrepreneur must develop the skills necessary to read and derive meaning from the three core financial statements:
Use the Balance Sheet to evaluate worth and risk (credit, liquidity etc.)
Use the Profit & Loss to analyze margins, profitability, trends, cost drivers
Use the Statement of Cash Flows to track the sources and uses of funds
Compiling these financial statements in an accurate and timely manner is the crux of accounting - as creditors and shareholders depend on them to evaluate the business. Each statement is like a puzzle piece that fits together to form a picturesque view of the business.
It is important to understand that no single financial statement tells the whole story, and collectively, (here comes the punchline) all three of them together won't give you the full script, either. You simply can't run a successful business using the traditional financial statements, alone. Accounting has its limitations.
So, Accounting Isn't Enough. Now What?
To "run" a company is to develop strategies, set priorities, identify target markets/opportunities, and to decide how resources get allocated on a daily basis. Decisions have to be made every day, often times with limited information. To stay ahead of the competition, entrepreneurs have to draw upon their experience and intuition to find other data points to give the company an edge. These data points, which we'll refer to as Key Performance Indicators (KPIs) will never show up on traditional financial statements. In order to capture them, you need dashboards!
There are three types of dashboards, one for each level within your organization. The first type of dashboard is for your front-line employees. It's an operational dashboard which tracks routine tasks and descriptive measures, so that your employees can evaluate their own performance in real-time. Here is an example of an operational dashboard:
Using this dashboard, an employee can track the number of cases that he or she closed each month, and the number of accounts that are still open. They can see which type of complaints they have the most trouble resolving, and where they have the highest concentration of complaints (geographically). T
The next type of dashboard is called, "a tactical dashboard," and its for managers. A manager's job is to motivate, coach, and empower employees to carry out tasks with increasing efficiency -thereby eliminating waste and errors. A manager is tasked with keeping projects on time and on budget. A good tactical dashboard captures project status and team performance against certain benchmarks or targets.
The last type of dashboard is called, "a strategic dashboard," which tracks the high-level business goals vs actual results. Strategic dashboards are for top executives who are primarily concerned with overall company growth and profitability. Here is an example.
Earlier in the post, we outlined the four big accounting limitations (forecasting, insight, project progress, and daily management). Dashboards help fill in these missing gaps that are inherent in the accounting system. They'll help you identify process and people problems well before they show up as liabilities on your balance sheet or costs on your P&L.