Financial Metrics

In the last blog posting, I discussed the importance of sales metrics. Almost everyone agrees that financial metrics are important. The problem is not getting agreement on their importance but on actually implementing a system that generates, as matter of routine, accurate and reliable financial data and metrics.

I have found that the main reasons entrepreneurs in a small business environment do not get financial information is rooted in three internal system flaws:

1. I will get to it. As a business is launched, there is not a lot of transactional data to manage so it is easy to put off implementing a financial reporting system – temporarily. Big mistake. The correct view is to use this light transactional volume period to get systems in place by making the investment of time and resources early in the business growth to test and implement all of the crucial systems that are going to be so important in the near future.

2. Doing it yourself. A fair number of entrepreneurs think that by doing the accounting themselves, especially early in the business start up cycle, is cost effective because they do not have to pay a bookkeeper or an accountant. This is a mistake. It is rare that money is saved by doing it yourself. The entrepreneur’s key role is developing business, not data entry.

3. Getting financial information and not reviewing it religiously. Having the information and not reviewing it weekly, if not daily, is a crucial mistake that is hard to comprehend. This is like knowing that the bathtub faucet in your home is on but never bothering to check it and just letting it run.

At a minimum, a weekly review of the cash position, sales metrics and a set of key financial metrics that show the financial health of a business at any point in time is essential.

I have seen otherwise successful businesses fail, not because they were not growing, but because the financial components of the business were mismanaged.

It pays to check that bathtub faucet frequently so when the tub is about to overflow you can turn if off or drain of the water out before the house floods and real damage is done.