Adventures in Metrics Dashboards and Management's Misadventures in Using Them
Dashboards have been a hot topic in business literature lately. Recommendations that business owners implement a dashboard for their business abound; however, advice on how to implement a dashboard is scant.
I can relate to this dilemma.
Occasionally, peers and potential investors would ask relatively simple questions about my aviation training company like, "What percent of your customers are repeat customers?", "What is your breakeven point?", and "What is your customer acquisition cost?" At the time, I was only slightly embarrassed that I didn’t know the answers to these questions. Regretfully, this led me to dance around the questions a bit, change the topic, and soon forget about my ignorance.
I was good at flying airplanes and assembling a team of flight instructors. That's really all I needed to know. So I thought.
My ignorance couldn't stay hidden forever, and I soon realized how I was hampering the growth of my company by not diving into the business’ financial and operational metrics. An insurance underwriter brought this to light for me when he asked operational safety questions that I couldn't answer definitively. My company valued safety, and we constantly sought to make the business even safer. However, I couldn't articulate the tangible metrics needed to make coverage decisions. During his visit, the underwriter inquired about the types of active students enrolled and their graduation rates—a seemingly simple question.
I didn't know!
Our insurance coverage was denied. We were forced to go with another carrier that charged significantly higher rates, which left less cash available for growth investments (marketing, staff training, community events, etc.). Something had to change.
The gap in my business understanding became more evident during my MBA studies where I learned about the metrics that managers of much larger companies use to ensure growth. I began to see my financial statements with renewed clarity once I understood the importance of tracking my company's Gross Margin, Operating Profit (EBIT), and EBITDA. As my studies progressed, I learned the incredible insight that can be extracted from metrics that use both my Income Statement and my Balance Sheet. I studied how to calculate Days Sales Outstanding, Days Payables, Days Sales of Inventory, Return on Assets, Return on Equity, etc.
However, I struggled to translate my classroom knowledge into real-world application. I had no idea how to measure my business in terms of the aforementioned metrics on an ongoing basis without spending hours in Excel formatting exported data from multiple systems.
So I did the only thing any recently minted MBA in Finance could be expected to do—I began to build a dream dashboard for my business using my classroom knowledge and professional experience to brainstorm everything that I, as a business manager, need to know.
During this process, a pattern emerged as I classified my metrics as either operational or financial. There were phenomena in my business that occurred much more frequently than, and well in advance of, the traditional metrics that I had learned about in business school. Certain real-life events would impact our operating metrics, then our financial metrics and finally our profitability and cash flow (more on the difference between profitability and cash flow in another post). Operating metrics, which were often custom defined and didn't apply to companies across all industries, were the best indicators of what was actually happening in my company. Operating metrics allowed me to quantify and steer many phenomena that previously had seemed intangible.
For example, we would often have periods of surging numbers of students followed by periods of low enrollment. These periods didn't seem to be seasonal, so something else had to be the cause. We developed a Growth Index for our flight school, which was defined simply as the number of student enrollments divided by the number of graduations during a specified time period. Based on our historical data, our Growth Index correlated with our net income, but with a time delay. Our Growth Index led our net income by four to six months. This made sense since our clients' training periods averaged six months. If students enrolled at a slower rate than students were graduating, our revenue and profitability remained steady until the students who enrolled before our recruiting lag graduated.
Our excitement grew. We had uncovered a tool that allowed us to better predict the movement of our net income four to six months in advance and to be proactive about it. Moreover, we started to learn appropriate ranges for our Growth Index. A high index indicated that we were not graduating students on time. A low index indicated that our recruiting efforts were becoming ineffective.
My dashboard was a marvelous thing. It contained a summary area with the top few metrics that measured the real drivers of our business. It contained other areas, segregated by category, which gave us a deeper insight into things like top customer performance, marketing metrics, asset maintenance, and financial metrics. We even built out sections for each team member so that we could evaluate specific operating metrics (for us it was a close ratio of demo flight to student enrollments, but this could easily be close ratios in almost any industry.) Yes. Marvelous indeed.
A large problem remained. Populating and formatting this dashboard took enormous amounts of time that my business partner and I did not have. Without a fully updated dashboard, we lacked concrete data on which to base decisions. Our management meetings eventually digressed to conversations about how to grow our business that were based on emotion and gut feel. But soon the next crisis hit our business, and we were forced to spend some time diagnosing our historical data. Yet again, we found correlations that had begun to emerge several months before the crisis hit our income statement. If we had been monitoring our metrics, we could have lessened or even avoided the impact to our income statement.
We decided "never again" and resolved to watch our data on a real time basis. Although we found numerous applications that would populate a dashboard full of financial KPIs, we couldn’t find any that tracked operating KPIs unless we were willing to pay thousands per month in licensing fees plus enormous set up costs for ERP solutions. Our small business needed something at a better price point.
We took an action more drastic than most. We hired a custom programmer to build a platform that extracts data from our accounting system and other applications, aggregates it, and populates our dashboard in real time resulting in more effective management and team meetings. Decisions are no longer made using back-of-the envelope math. Instead, we simply view all of our KPIs (financial and operating) on our dashboard to make informed strategic decisions about opportunities for improvement and growth.
While I don't necessarily recommend that every small business hires a custom programmer to create a system for auto populating their dashboard, I do recommend that everyone creates his dashboard and watches it—often.
Some metrics need to be reviewed once per month, some once per week, and some every day. I speak with too many business owners who have no dashboard at all—even business owners with revenues into the tens of millions of dollars, who have only done well by either chance or exceptional talent. However, they are likely missing out on enormous opportunity to grow.
David Cusimano is Founder of Emerge Dynamics, a Founding Partner of Gulf Search Capital, and a faculty member in the Goldman Sachs 10,000 Small Businesses Program. He holds the Certified Turnaround Analyst and Certified Merger and Acquisition Advisor designations.