The Business Scoreboard

Let's suppose you are the head coach of your favorite professional football team. You are in the Super Bowl and there are 3o seconds left in the game. You are on your opponent's 40 yard line. The big question is .... What play do you call?

Your answer will most likely be ..... "What is the score? Is my team winning by 28 points or are we losing by 2 points?" The score will dictate which play you call. You are certainly not going to call the same play if you are losing by 2 points that you would call if you are winning by 28 points.

The same is true in business. The score will determine which business play you call. You have to know your business score. Just what do I mean by "business score?" For the typical small and mid-size business, there are five items that make up what I call the business score.

• Cash on Hand: How much cash do you have NOW? How much is in the bank?
• Receivables: How much do you have and when will they become cash?
• Payables: How much do you owe and when do you have to pay it?
• Budget variance: Are you on budget with your P&L and Cash Flow Statements? If not, are you better or worse? WHY?
• How much gross profit (margin) do you make on each item you sell?

To be successful over the long term, you must constantly monitor the five items I have listed above. Without knowing each of the items above, you can't make a good business decision. You can't call the right play. Just think about any sport. Does Tiger Woods play aggressively or conservatively? To decide, he has to know where he stands against the competition.

In the case of a business owner, she has to decide whether or not to take the order even though her profit margin will be only 25% of her normal profit margin. Should she sponsor the local charity race? Is business bad enough that she has to lay off her best employees? Without a scoreboard that shows her business "score," how can she decide what to do?

To keep score, three things are necessary. First, you have to have a good accounting system. It does not have to be complicated or complex. But it has to provide the reports you need to keep score. Secondly, you need to update it at least weekly so you can get reports that are CURRENT. Getting one set of reports at the end of the year won't do you any good for decisions you have to make all year long. Finally, you have to take the time to review and analyze the reports. Don't tell me you are too busy. You can't win the game if you don't know the score.

Here are two very real situations of what happens when you don't keep score. A friend of mine opened a restaurant in a mid-size city in Minnesota. Despite all that he knew he should do, he was always too busy to keep score. Finally, as money was running out and he was about to go out of business, he decided to look at his gross margin. He discovered that he was selling most menu items for less that his food and labor costs. One month later he closed the doors.

Three gentlemen I know started a real estate related business in a southern state in the late 1990s. Sales grew rapidly and the checkbook always had a large balance. They had plenty of money to hire more people, buy more office equipment, etc. Since the checkbook always had a large balance, they thought they were business geniuses. The only part of the score that they ever looked at was the checkbook balance. Of course, that is important, but it is only one factor of the company's score. They never looked at payables and receivables. Suddenly, the real estate market in their area went down, way down. The checkbook balance was significantly smaller. It was then that they started to look at the other components of the score. Too late! They had a great deal more in payables than receivables. For the last few years they thought that their expenses seemed really high, but they had not done budget planning so they had nothing with which to compare them. Six months later the company no longer existed.

Do I tell you about these true stories to scare you? YES, I DO. It can happen to you and it probably will if you're too busy to keep score.

The next posting will discuss "how" - how to budget and how to keep score. Please post your comments. We are always anxious to know your opinions. Visit our web site at http://www.sentrabusinesssolutions.com/. If you want to email me directly, you can email ron@sentrabusinesssolutions.com. Thanks for reading our business helper blog.