August 18, 2010

As companies grow, they inherently become more complex. They eventually outgrow the capacity of their founders to be involved in every single detail of the business. There are too many customers, employees, products, projects, vendors, and suppliers with which one person can be intimately involved.

As the leaders of thriving companies become removed from the details, they feel a loss of control and will likely struggle to know how the company's cash flow and profitability are really performing. They have to rely on reports with lots of numbers and data to understand how the company has done and make the best decisions possible to help the company succeed in the future.

The transition from a startup to a booming company is often difficult for founders and entrepreneurs. They have to re-train their intuition to process reports and data rather than talking to their employees and customers and reviewing the bills from their vendors and suppliers. While they should still engage in getting information from these qualitative sources, quantitative data will become more and more important to them as the company grows. Generally, quantitative data measurements need to cover both the past and future on a daily, weekly, monthly, quarterly, and annual basis.

Daily Reports

Find one to three measurable pieces of information that can be reported daily. The items included on the daily report need adequately to allow the management team to answer this simple question: "Did we win or lose today?" Some examples include gross profit per day, daily units sold, billable hours worked, backlog, and more. In addition to reporting actual performance on a couple of critical ratios, thriving companies need to know what tomorrow will look like. Measuring performance is not the reason to be in business, but it is critical to running the business effectively.

Weekly Reports

Have a weekly report that highlights between 12 to 20 data points, with at least one or two coming from each of the critical areas of the business: marketing, sales, operations, finance, R&D, etc. These might include number of leads, leads converted to sales, cost per acquisition, revenue, revenue per employee, number of employees, percentage of receivables past due, working capital, current ratio, and more. (You can receive some more ideas on what should be included from one of my recent blog posts, The Key Business Metrics Every Entrepreneur Must Know.)

Besides knowing how the business did last week, this report should also project the company's performance on these key numbers for the week to come. Also look at an updated cash flow projection (at least 90 days and up to 270 days into the future) each week so your company can adequately plan for and adjust to cash flow shortages and excesses.

Monthly and Quarterly Reports

It is also important to have monthly and quarterly financial and operational reports, which include monthly financial statements. The monthly financial statements should include comparisons to prior years and months in the business as well as to industry averages and benchmarks. Performance relative to the company's plans and budgets, as well as projections for the next month and year, should also be included and analyzed. Pay particular attention to validating and invalidating assumptions, and then improving them from month to month. Similar reports need to be reviewed on a quarterly basis, but they are typically more summarized and need to include lots of charts and graphs for quick review and presentations, often to the company's board.

Annual Reports

Companies should revisit their five-year financial model and plan on a yearly basis. This includes a careful assessment of all of the assumptions that went into the model and updating those assumptions based on the actual performance of the company. Many business owners fight this activity because they feel it is too hard to project five years into the future. While it is certainly hard (and I have yet to see anyone that has projected their business performance perfectly for five future years) the exercise always yields helpful information to build a more competitive and sustainable business.

Conclusion

If you want to give your business the best chance to succeed, you may want to consider establishing processes for all of these critical past and future reports. They will help you make sure your company is improving its cash flow, profits, and financial health!