How to Spot These 6 Financial Warning Signs and What They Mean

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If you read the headlines of national and local news, it is amazing that so many businesses are seemingly strong one day, and the next they are closing or filing for bankruptcy.

One of the many reasons this happens is that business owners and managers don’t pay attention (or don’t want to acknowledge) the financial warning signs that could have saved them. By the time the financial collapse starts, it’s often too late to change course.

6 Warning Signs You Can Look For

To help you spot these warning signs, here are the 6 financial red flags that we coach our clients to take action against:

  1. [The Most Telling Sign] Cash Holdings and Equity Are Lower Compared to the Previous Periods
    Take a look at your balance sheet and income statement to determine your overall cash holdings and equity (Assets-Liabilities). If your liabilities are higher, ask why.  Negotiate terms to lower credit rates, extend payment terms, etc. Involve other departments to determine how your business can operate more efficiently and cost-effectively. Discuss simple ways to increase revenue without significantly increasing overhead.
  2. Days in Accounts Receivable Increasing
    Many customers are pushing the envelope with their payment terms. Create a process for collecting outstanding receivables, and ratchet it up when customers start paying late. Customers often pay those vendors with strong systems, and delay payment to those suppliers who don’t have solid collections practices. This doesn’t mean that you won’t work with a long-standing customer who asks you for some flexibility. It does mean that you implement smart AR strategies such as late payment fees, outsourced collections help and credit reporting with clear communication and consistency.
  3. Not Enough Cash Flow for Accounts Payable
    Order in smaller quantities of goods/services from your suppliers. Talk to vendors to negotiate extended terms, leveraging your long-standing relationship and good business practices.  Use a credit card with 60-day terms to maximize the number of days to pay (make sure to review your credit card agreement and understand the terms). Search for discounts for paying within terms if your suppliers won’t stretch the terms. These strategies may not impact your cash flow immediately, but they can have an overall impact by improving your bottom line, since you are buying product or services at a lower price. Get a good handle on your inventory, turn rate, spoilage, sales trends, etc. so you actually buy smarter.
  4. Evaluate Profit Margins and Turnover Ratios
    We all know that decreasing profit margins are a bad sign, but they can’t be evaluated alone. Turnover ratios are also an important factor. Remember, mega grocery stores and warehouse clubs have low profit margins, but high turnover ratios that result in adequate net income and, more importantly, reasonable cash flow. The key is to look at both your profit margins and turnover rates together because how they interact will ultimately tell you how much cash has flowed into your bank account.
  5. Indirect Overhead Growing with Increase in Sales
    Take a hard look at operations. Are you running as efficiently as you could be? Are your employees productive or can they take on more responsibilities? There are more costs to adding employees than just salary, benefits and taxes. You have equipment, space, recruiting/training time, etc. for each employee you hire. The goal is to increase sales without increasing your fixed overhead. If you find there is nothing you can do to avoid increasing your fixed costs, you might need to re-evaluate your business strategy to determine how you can raise your profit margins to accommodate for your increase.
  6. Warning Signs Outside Your Business
    Every business should use and review a weekly dashboard that includes many of the warning sign financial metrics listed above: gross profit margin, average daily outstanding AR, inventory turns, days payable outstanding, available line of credit, operating profit margin, etc.  But ultimately, there are other warning signs that may not be on your dashboard.   Below is a story from a business who engaged a trusted advisor for an outside perspective.

 A Real-World Example of Heeding the Warning Signs

“Most people under-emphasize the available line of credit,” says Joe Dresnok, a consultant with Management Horizons. “The perfect storm for a company is a down economy, reduced sales and the inability to reduce overhead. When this happens, a company needs to access their credit lines to get through the tough times, and invest in other avenues to generate revenue.”

But during a slow economy, banks will reduce credit lines. One of Joe’s clients had a $300,000 line of credit, of which they had drawn down 1/3.  Joe and his team recommended the client draw down the rest of the credit line. Within 30 days, the bank came to give the “bad news” that they were reducing the company’s credit line to $100,000. The company was happy to report they had already tapped out all $300,000 of the original credit line. “In essence, they preserved $200,000, which translated to staying power.”  In this case, it was definitely worth the cost of that credit to preserve the line.

Each company has its own specific set of measurements (metrics) to help owners understand what to look out for in their financials. (Here are the 8 essential financial metrics we recommend tracking.)  This will at least give you the chance to prevent your company from embodying a quote from Ernest Hemingway:  When asked how one goes bankrupt, he said “Two ways:  Gradually, and then suddenly.”

Watch for the warning signs!

The Numbers Coach Stitches Together Financial Plan for Fabric Company

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big duck canvas logo

The Company
Big Duck Canvas (“BDC”), founded by Shawn Mitchell, provides high quality fabrics, canvas and threads to both wholesale and retail stores. Their services include customer cut-and-sew fabrics and fabric printing, which adds a customer’s design features to a fabric. BDC distributes its products throughout North America and can be found online at www.bigduckcanvas.com

The Situation
The BDC team wanted to enhance their financial management and reporting. They were looking to create a platform to communicate the company’s key performance indicators (“KPIs”) that drive its financial results and gain a better understanding of their numbers. The BDC team wanted a financial “road map” that could guide them as they made financial decisions regarding strategies for growth.

The Solution: Numbers Coaching
Numbers Coach (“NC”) coaching services was an ideal fit for BDC’s needs. NC developed a financial scorecard focusing on financial drivers that gave the team visibility into the profits and cash flow critical to sustained profitable growth. The scorecard offers an “at a glance” view of results. NC also developed a financial model using its Numbers NavigatorR proprietary software, providing the financial road map for the BDC team to see where they were headed with profits and cash flow. The Numbers NavigatorR provides a rolling forecast, allowing the BDC team to make financial and operational decisions towards the achievement of their goals.

The Results
NC pulled together financial and non-financial data to complete a customized scorecard and a financial model. NC met with the BDC team regularly to review results and provide numbers coaching around the financial results. From the monthly meetings, the BDC team could take actions on activities to improve the company’s bottom line results and implement best practices.

Learn more about our Numbers Coach financial leadership services here

A Financial Dashboard Helps You Manage Your Business in Minutes

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There are many hats to wear when you own a business. One moment you’re a salesperson, the next you’re working on customer service or human resources. It comes with the territory.

But not all hats are equally comfortable. For many entrepreneurs, the financial management hat can be a tough fit. Why? Business owners have time limitations, and the time commitment for financial management can seem too great.

A good dashboard, however, can help make financial oversight of your business time-effective. You need only spend a few minutes weekly to have a good idea of where you stand.

Key Data at a Glance

Here is a dashboard that’s designed for a manufacturing operation. It focuses on just four pieces of basic financial information:

  • Sales
  • Cost of goods sold
  • Expenses
  • Profits

Let’s assume the business is the startup of a first-time business owner. The metrics are very simple. The graphical presentation is attractive. The dashboard provides real-time figures for the current month, as well as year-to-date performance. The first metric the owner sees on the dashboard is sales – arguably an important piece of information for a new business. The current month’s sales are broken down by product, so the owner can quickly check which products are selling well and which are selling poorly. Below the monthly sales total is a bar graph of the year’s trend, which shows steady progress. At the bottom of the column is a comparison against plan, which quantifies actual versus budgeted sales.

The purpose of the dashboard is to provide up-to-date information about the key performance metrics of the business. In just a few minutes, the owner can grasp the extent of the company’s sales success (or failure, as the case may be) with insight into the products and cost characteristics most responsible for the results. Spotting trends early can help a business owner make changes need to impact the financial results.

Tracking Your Key Metrics

The dashboard example provides some key metrics for a fledgling manufacturing company. But, what if your company provides professional services? Obviously, you need different metrics for your dashboard. Each business is unique, and the metrics tracked will vary from one business to the next.

Here are some of the key metrics Trillium Financial tracks for its clients:

Profit & Loss Metrics

  • Sales Growth
  • Gross Profit
  • Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
  • Net Profit
  • Fixed Overhead as a Percentage of Sales
  • Sales per Full-time Employee
  • Net Profit per Full-time Employee Equivalent

Balance Sheet Metrics

  • Days’ Sales Outstanding (collection cycle)
  • Inventory Turnover Rate
  • Days’ Payables Outstanding (payment cycle)
  • Debt-to-Equity Ratio
  • Current Ratio

Trend Metrics

  • Sales for Trailing 12 Months
  • Gross Profit for Trailing 12 Months
  • EBITDA for Trailing 12 Months

As you might imagine, an experienced business owner may know some of his financial ratios like the back of his hand. Even so, an owner should use a dashboard to track metrics that are important for their current financial management and most of all those metrics that drive cash flow. The metrics will likely change over time to add precision. For example, an experienced owner might know that overtime pay is the surest way to diminish the company’s profitability. Their dashboard tracks the average labor rate paid as a key business metric. A documented metric helps you spot trends that can create action.

A business may start out measuring a bunch of different metrics that are both financial and operational and eventually narrow the number of metrics down to those that are predictive and meaningful. I encourage you to develop a dashboard that helps you manage your business; after all, “What gets measured gets done.”

Let us know how we can help you develop a dashboard that works for your business.

Do You Have A Red Flag In Your Business?

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Small emerging growth companies often have limited resources and limited staff performing critical functions in accounting/finance.  Below is a list of tips that might indicate a closer look at your records for accuracy or the opportunity for fraud.

  • A spike in payroll expense without a reasonable explanation
  • Accounts receivable is growing but your sales are flat or down
  • Vendors who are being paid but you are not familiar with them
  • Human Resource records are minimal or non-existent for employee pay changes
  • Expense actual vs. budget shows a variance that is not reasonably explained
  • Prepaid expenses are growing consistently month to month but most expenses are flat or down in your income statement

I read an article recently where the same accountant who posted and deposited customer receipts had embezzled $126,000.  How?

The employee deposited customer checks to their ATM which is not always checked thoroughly the banking system.  The accountant then marked the corresponding invoice as “paid” and used the subsequent checks that came in for newer invoices.  This process could only go on for so long because the accounts receivable would grow from a larger pool of unpaid invoices.  Just as the accountant was about to leave the job, the embezzlement was discovered.

It was discovered by auditors checking on the cycle of a paid invoice; from receipt of check, to posting payment to the invoice, to depositing the check at the bank.  Some invoices shown as “paid” did not have a corresponding deposit.  Getting a copy of the deposited check from the customer revealed a different account number from the company’s account and discovered it was a personal account of the employee.

Here’s to a system of processes and activities that represents the phrase “trust but verify” to help you mitigate any circumstances where the health of your business is compromised!

Mike

Measuring Your Performance

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One of the quotes that keeps coming back to me is “What gets measured gets done.” This simple mantra has held true for me both professionally and personally.  I sat down the other day to look at a set of goals that I had set 5 years ago.  I actually had forgotten about the document until I ran across it while cleaning out paperwork to start my new year.

It is amazing to see the power of writing down the goals and how they actually came true.  Not all of mine happened, but a good chunk of them did.  

Here were my goals:  

  • Take a family trip to Europe.  Checked that one off despite having three teenage girls going in multiple directions with their activities.   
  •  Expand our current home or find one more suitable. . . four years later, a more suitable house became available.
  • Be a part of a charitable foundation that gave back into my community…done, I began serving on the board of New American Pathways three years later.

For me the quote “from lips to pencil tips” says it all.  Once I write down the goal and use the SMART principles…accomplishment is not too far away.  SMART goals are: 

  • Specific
  • Measurable
  • Actionable
  • Realistic
  • Time bound

What are your goals?  Have you written them down?  Can you measure them? 

My challenge to you is to write down up to three goals you want to accomplish over 1, 2 or 3 years.  Check on them every so often, and then 4 or 5 years later you will see the power of performance measurement.

Here’s to achieving SMART goals!  

Mike

Numbers Coach Eases the Pain of Financial Management for Medical Practice

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The Company

Pain Care, LLC (formerly Georgia Pain and Spine Care) is a leading pain management medical services firm that provides comprehensive solutions to help restore each patient to their original lifestyle. The company uses progressive approaches to pain management with education, counseling, and minimally invasive procedures. Their mission is to relieve pain, increase productivity, and improve the quality of life for its patients using technologically advanced treatment regimens through its various metro Atlanta offices.

Situation

In 2020, the Pain Care team wanted to enhance their financial management and reporting capabilities. They wanted to create a platform to communicate the company’s key performance indicators (“KPI”) and help educate its key team members on what drives its company’s financial results. In addition, the Pain Care team wanted a “road map” that could guide them as they made financial decisions impacting strategies for growth.

Solution:  Numbers Coach Leadership and Numbers Navigator™ Services

The Numbers Coach (“NC”) financial leadership services were an ideal fit for developing Pain Care’s performance metrics. NC developed a financial scorecard to focus on the financial measurements that drive company profits and cash flow critical to sustained profitable growth. The scorecard offers an “at a glance” view of results. NC developed a financial model from its proprietary software, the Numbers Navigator™ . The software provides a road map for the Pain Care team to see where they are headed with profits and cash flow. The software’s rolling financial forecast provides the Pain Care team with a tool to make critical decisions “on the go” to achieve their desired results.

Results

NC pulled together financial and non-financial data to complete a scorecard and financial model. Each month NC meets with the Pain Care team to methodically review results and provide the input and analysis from NC’s Numbers Navigator™ financial software. From the monthly financial coaching meetings, the Pain Care team can take actions on activities that improve the company’s bottom line results.

For more information on Pain Care, LLC visit www.georgiapaincare.com

To learn more about the Numbers Coach financial leadership services, click here

“Mike has become an important part of our team.  His understanding of financial processes, cash flow, and approach to educating us on our results gives our team the right tools to help us understand how to navigate our finances successfully and stay focused on our financial goals.”  

Dr. Charles Brownlow, Founder / Medical Director

Keep Your Finger on the Pulse of Your Business

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There are plenty of ways to measure the financial success of your business: profit margins and revenue growth, for instance.  But do the old standby measures give you the whole picture? It’s never too early or too late to try out new ways of analyzing the financial health of your business.

I recently came across a 2017 Inc. magazine article written by entrepreneur and author Norm Brodsky. In “Pencil Power” he suggests an assessment method that would have been called “old fashioned” in the past, but today might be termed “retro.”  It involves—brace yourself—a pencil and paper.  (Yep, I’m coming back to the same pencil and paper I mentioned in a blog post a few months ago.)  Brodsky believes that tracking monthly sales and gross margins by hand is especially beneficial to new, or relatively new, business owners.

He says the practice will improve young businesses’ chances of success 100 times over:

“By writing the numbers down and doing the calculations yourself, you begin to have a feel for the relationships between them. Later on, when other people are reporting numbers to you, you’ll be better able to recognize when something’s wrong.”

Brodsky recommends a simple exercise to try at the end of each month: write down sales, cost of goods, gross profit, and gross margin of each product for both the month and year-to-date. Then write down the same information for each customer.  This is a quick way to see where you are saving money and where you aren’t.

If your business is already doing a good job tracking these metrics, there might be others that could shine light on an area that’s erratic or negatively trending. Try writing down monthly inventory holding costs or Accounts Payable and Accounts Receivable totals. Maybe some cash flow metrics need attention.

It’s a painless, 30-minute exercise that just might surprise you by exposing a weak or strong area of your business that’s been hiding in the dark. Add it to your evaluation and decision-making arsenal. I suspect you’ll find it insightful.

Let us know if we can help you track your metrics.

Wondering How Your Company Stacks Up Against the Competition?

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by Michael Iverson

At one time or another, every business owner yearns to see how his or her company stacks up against the competition within the same industry. Comparing a company’s financial performance against that of its peers is likely to provide clues about how to improve the company’s results. For instance, it would be important to know whether a company’s administrative costs are significantly higher than those of others in the same industry.

Unfortunately, it’s not always easy to access competitive data. Competitive companies aren’t likely to publicly share financial results. Even if they do share some information, a large difference in size of a comparative company makes analysis difficult.

One way around the problem is to conduct the analysis using a Common-Size Income Statement, which converts a company’s income statement from dollars to percentages.  Every line on the income statement is expressed as a percentage of Net Sales.

Using common-size income statements makes it possible to compare companies that are different in terms of size but in the same industry. While it might seem unlikely to compare two competitors with Net Sales of $4 million and $100 million respectively, focusing on percentages can bring relevance to the analysis.  It also helps spot trends in your business, when comparing results to a prior period, for instance.  You can address the issues before it’s too late.

In the example below, Warning Lights of North Georgia’s income statement is shown alongside its common-size income statement. In the left-hand column are raw, dollar-denominated figures. The right-hand column shows the converted percentages.  The percentages are based on a percentage of sales.  In other words, you would divide the expense by the sales.  For example, in the spreadsheet below, selling expense of 11.9% is determined by the following formula: 1,223,000/10,281,000= 11.9%.

 

Now, Warning Lights of North Georgia’s results can be compared – line by line if so desired – to those of any other company in the industry.  (The financial statements of publicly-traded companies are accessible through the Securities and Exchange Commission’s EDGAR database or its Canadian equivalent SEDAR.)  Industry averages are compiled by national trade associations and a handful of competitive intelligence information services.  Banks, business brokers and good business libraries are likely sources of such information.

Using common-size financial statements, it is possible to determine how your company performs within its industry against the competition. Common-size income statements may be particularly useful in measuring the cost-effectiveness and profitability of a company against its peers as well as spotting trends when comparing multiple periods of your own financial results.

What Is the Balanced Scorecard? (And Why Should You Care?)

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By Michael Iverson

If a business advisor told you that more than half of the largest U.S. corporations used a particular management tool, chances are pretty good that you would be interested in using it for your business.   The balanced scorecard is, in fact, widely used by America’s largest companies. Editors of the Harvard Business Review named it one of the most influential business ideas of the past 75 years.

The purpose of the balanced scorecard is alignment of strategy with the daily activities of a business.  It was introduced as a performance measurement framework in the 1990s by two business professors — Drs. Robert Kaplan and David Norton. The idea is to augment traditional financial business metrics with strategic, non-financial performance measurements. In combination, the two very different kinds of measurements provide a more balanced view of a company’s performance, especially its progress toward achieving long-term, strategic objectives.

A Change of Focus

The balanced scorecard attempts to address a long-time shortcoming of U.S. businesses – their focus on attainment of quarterly earnings goals, while paying too little attention to building long-term value. By focusing on near-term earnings, which are easily measurable, American businesses often neglect investment in intangibles, the returns of which are more difficult to measure.

Focusing on past events causes companies to under-invest in important areas like product and process innovation, building and retaining employee skills, and improving customer satisfaction levels.  These intangibles contribute significantly to the long-term value of a business.  Companies create future value by investing in customers, suppliers, employees, processes, technology and innovation – the intangibles that matter today.

Companies can only improve management of their intangible assets if they integrate measurement of those intangibles into their management systems. This notion led to development of a management tool for describing, communicating and implementing strategy – the balanced scorecard.

The scorecard envisions a company’s Vision and Strategy at the center of a continuous feedback loop, surrounded by four perspectives, each with its own business metrics. A company collects and analyzes data relative to each perspective.

The Learning & Growth Perspective

Employee training, individual growth and company-wide improvement are hallmarks of great companies. Employees who embrace technological advances and mentoring become more productive. Their collective knowledge significantly enhances the company’s value.

The Business Process Perspective

Managers need to know how well the business is performing based on its internal processes. Are the internal processes allowing the company to produce quality products and services, while achieving incremental improvement? The metrics for this perspective are unique to each business and should be designed by managers who are intimately aware of both internal processes and customer needs.

The Customer Perspective

Perhaps the most important management concept of recent years is the realization that meeting, if not exceeding, customer expectations is a leading indicator of business success. Customers whose expectations are met or exceeded become extremely loyal, building business value. When expectations are not met, customers begin to look for other suppliers.

The Financial Perspective

Traditional financial analysis does provide useful information. Kaplan and Norton suggest that it is most useful when it encompasses risk assessment and cost-benefit measurements, and when it is balanced by data from the other three perspectives.

If you would like help in creating a balanced scorecard for your business, just give us a call at (404) 353-2148 or send us an email, and we will be happy to help!

Prominent Placement

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Company
In 2001, Stacy Williams launched Prominent Placement, Inc. (“PPI”) with the vision of creating a preeminent search engine marketing company.  The company focuses on helping drive targeted traffic to their clients’ websites and generate traffic that converts to sales.  Stacy’s firm is at the forefront of the changes occurring in the online world of search engine marketing, ensuring their clients are up to date on the technologies and methods considered best practice.  But most of all delivering results that grow their clients’ revenue.

Situation
As an emerging growth company, PPI was at a crossroads on several key operational decisions that would impact the company financially.  Stacy and her team needed an understanding of whether the company could afford to make those decisions, including committing to lease office space.  PPI was looking to move from a pure virtual office to a hybrid model (office space and virtual office).  They needed to know how much space they could afford, when best to make the change, and how to fund it.

Solution
PPI hired the Numbers Coach (“NC”) to provide a comprehensive analysis of its financial operations.  NC used its Numbers Navigator™ to assist the PPI team in assessing its ability to fund the key business decisions.  Through a discovery session and gathering of financial data, NC gained an understanding of the key financial drivers of PPI’s business.

Results
NC provided Stacy and her team with a comprehensive financial report that outlined how PPI could implement its decisions and understand the financial impact.

  • A 20+ page financial report with key performance indicators (“KPI”) driving the business
  • An Executive Summary outlining PPI’s cash flow drivers and how to increase cash flow
    • The summary also provided recommendations on what decisions the company could afford to do.

 

“Understanding the financial end of my business has always been my weakest area.  After working with a variety of other financial advisors over the years, Mike Iverson was finally able to explain my own company’s financial data to me in a way that really made sense.  He has educated me on how decisions we make all year long will impact our cash flow at the end of the year (and every day).  I feel like, after nearly a decade in business, someone has finally shined a flashlight into our numbers so that I can really see and understand them.  I feel much more in control.”

Stacy Williams, President
Prominent Placement, Inc.
Strategic Search Marketing

Understanding Your Financial Story: The Numbers Coach’s Numbers Navigator

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I have heard many times that business owners feel that their financial statements are written in a foreign language or that their financials feel like peering into a big black box uncertain what it truly contains.  Others describe it as a fog where they see the outline of their business but it’s not clear how to navigate the rugged coastline.

Often a business owner will understand the income statement and the fact that if you have a positive number at the bottom of the report, it’s good.  The bigger the better!  But then I hear, “wow I had a good year but I don’t have any cash left to pay my bills or make other investments.”

Your financial story has two sides to it, not just one.  It has the income statement plus the balance sheet.  Your balance sheet story is important because if you don’t manage it properly, it can “rob Peter”- the income statement, to “pay Paul”- the balance sheet.  How you manage your working capital will ultimately tell you how much cash is left in your bank account.

Before we go further, let’s define key components of working capital that drive cash flow.  In most companies Accounts Receivable, Inventory, and Accounts Payable are key cash flow working capital components.  How you manage these three key balance sheet accounts determines how much cash is left over.  Simply put, you want to have the shortest payment terms possible for your customers (Accounts Receivable) and you want the longest payment terms possible to pay your vendors (Accounts Payable).   For your inventory, you want to turn it over quickly and not let it sit in your warehouse gathering dust.

By connecting the financial story of the income statement to the financial story of the balance sheet, you can effectively see how cash flow is generated and how much of it you get to keep.

The Numbers Coach’s (“NC”) Numbers Navigator™ helps lift the fog and navigates you to the safety of the harbor where your company can see how to re-fuel and get back out on the high seas of commerce.  Through Trillium’s financial coaching and data gathering process, we gain an understanding of the business model and its drivers to effectively recommend actions best suited for a company to increase cash flow.

NC’s Financial Coaching services and Numbers Navigator™ helped Prominent Placement, Inc. (“PPI”) learn what financial drivers would help the business generate more cash flow and achieve several key financial goals.  Click on the following link to learn more about how NC’s Numbers Navigator™ can help you:  Numbers Navigator™

“Understanding the financial end of my business has always been my weakest area.  After working with a variety of other financial advisors over the years, Mike Iverson was finally able to explain my own company’s financial data to me in a way that really made sense.  He has educated me on how decisions we make all year long will impact our cash flow at the end of the year (and every day).  I feel like, after nearly a decade in business, someone has finally shined a flashlight into our numbers so that I can really see and understand them.  I feel much more in control.”

Stacy Williams
Prominent Placement, Inc.

Metrics: It’s Time to Keep Score in Your Business

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by Tim Fulton

I enjoy playing golf but it can be a very frustrating game.

For that reason, I typically do not keep score when I play golf. I find that it makes the game more enjoyable when I leave the scorecard and the half-pencil in the clubhouse. I have also found that over the past three decades that I have played golf, my game has not improved at all. If anything, it has deteriorated over time. But then it is hard to tell because…I don’t keep score.

When friends ask what I normally shoot when I play golf, I usually respond with: “mid-90’s.” That sounds pretty good and seems about right. The funny thing is that when I do actually keep score, I usually shoot in the high 90’s to low 100’s. In other words, I don’t score as well as I presume I do.

Many small business owners manage their business just like I play golf. They don’t keep score. Their reasoning is very similar to mine as well. They say it just makes running their small enterprise that much more frustrating if they must look at monthly financial statements or weekly sales reports. In addition, since they work in the business every day they “know” how the business is doing. When I ask a business owner questions about profit margins, sales figures, specific ratios; I will either get a blank stare (bad sign) or a rough estimate. Upon examining their financial statements, I usually find that their “rough estimates” are overstated (sometimes dramatically).

I tell small business owners that the question is not whether or not they should be keeping score in their business. What they are operating is not a leisurely walk in the park slapping a silly white ball from tee to green. This is their livelihood. This is their dream. This is their business. . . Instead, I inform them that the key question is what to keep score of? What should they be measuring and monitoring on a regular basis? How can they check the pulse of their business on a day-to-day basis?

My dad was an entrepreneur. He was not the owner of the business but he had to think like an owner. He was in charge of operating a large warehouse distribution center. I can remember being in his office and always seeing a small piece of notepaper (this was before “Post-Its”) in the upper front corner of his desk. On that piece of paper there were three numbers scribbled down. On one occasion I asked my dad what those numbers were. Little did I know at that time that I was about to receive one of the best business management lessons I ever received (in or out of business school).

My dad responded that his bookkeeper brought him this sheet of paper every day with three (3) numbers written on it. The numbers included the past day’s total sales, this day’s bank deposit, and the amount of accounts receivable outstanding that particular day. He explained to me that those three numbers gave him the “pulse” of the business each and every day. This is how he kept score of his business. Through his experience in managing this business, he knew what to look for in these numbers. He knew what was “below-par,” “par,” and “above-par.” He knew when his business “game” was on and when it was off. No guesswork here.

No one day’s number would cause a panic. He was more concerned with patterns. Were sales increasing? Were receivables under control? He had a mental chart of each of these figures and would take action when action was necessary.

In addition to these daily reports, he would also receive weekly sales and inventory reports. He paid close attention to the monthly financial statements when they arrived. However, it was those daily reports that he relied upon most and allowed him to best keep score of his business. They were timely. They were accurate. They were critical to his ability to successfully manage this multi-million dollar operation.

What numbers should you receive every day? You decide. Possibilities include sales figures, bank deposits, inventory levels, employee timesheets, production reports, accounts receivable, accounts payable, and profit margins. Every industry has different areas of performance that need to be looked at regularly.

I think three is the magic number. Pick any three of these numbers and watch them every single working day. That is your mini-report card for the day. That is your scorecard. Set reasonable standards for each figure and be prepared to take action when necessary.

Keep score for your business and watch it improve and grow.