Recently I helped refinish a basement for a friend and kept lamenting the fact that I often didn’t have the right tool to effectively get the job done. It is frustrating knowing that the perfect tool exists but I can’t put my hands on it to do the job. But imagine how I’d feel if I cobbled together a job only to discover later on that my friend had all along just the right tool that could have made the job quicker and more successful?
When it comes to business, I don’t want to be that friend who hides successful business tools from others. And so, in keeping with the theme of finishing basements, here are some of the most strategic business tools I know that are essential to make your business “building project” a success.
The rolling budget tool. Most business professionals know how to put together a budget and how to make it a useful management tool. But why are we so committed to the outdated practice of insane planning every fourth quarter to create a 12-month budget tied to the fiscal or calendar year? It is as if some unknown business god made a rule that on a magical day each year we get to “start over” in our financial planning. Jack Welch once wrote that budgeting as we practice it “brings out the most unproductive behaviors in an organization.” Enter the rolling budget, which eliminates the restrictions created by annual budgets and allows continuous adjustment along the way. Each month the current month’s budgeted figures are replaced with actual numbers and a new month is added on to the end of the budget. This tool forces people to think proactively, is more flexible, and it keeps everyone focused on optimizing financial performance all throughout the year — not just one day a year.
Key performance indicators (KPIs). Most advanced machines like cars and nuclear power plants have a dashboard with special indicators that give the operator a glancing picture of the health (and safety) of the machine. Businesses are no exception. Key performance indicators, or the company “dashboard,” helps executives monitor the health and progress of the business at its most vulnerable or productive spots. It only takes a few KPIs in each major area of performance (financial, production, cash flow, customers, sales) to give early warning signs of change that can alert an executive or manager to corrective action.
How does one pick the most appropriate KPIs for their company? Robert Simons suggests in Seven Strategy Questions that there should be at least two groups of KPIs, one that tracks financial goals and another that tracks performance goals. Another way to formulate your set of KPIs is to assign at least one KPI to each strategic objective or goal in your strategic or business plan.
The cash flow projection tool. We’ve all heard that “cash is king,” but how many of us actually manage cash flow as diligently as we manage profit? In a very informal survey of Colorado Springs SME businesses, I found that only about 1 in 10 regularly use the most effective tool we have at our disposal to proactively manage cash. It’s called the cash flow projection. Whether you are projecting cash inflow and cash outflow for the next six weeks or the next six months, without the disciplined and regular use of a cash flow projection, you are like the driver of a car that is only looking about 1 foot ahead of the front bumper to steer down the road. You have no idea of the bumps or obstacles looming farther ahead because you aren’t looking. The cash flow projection is one of the most valuable forward-looking tools we have in our arsenal (most other key performance tools look backwards). Download any one of the cash flow projection spreadsheets on the Internet and start using it today.
Trailing 12-month charts. Vistage International business speaker Kraig Kramers calls the trailing 12-month chart “the only source of information about your business that will always tell you the truth and clearly indicate where you are headed.” Each T12M data point is simply the sum of 12 months of actual data ending in the current month. As each month passes a new T12M data point is added to the chart, giving a graphical story of the trend line in that strategic indicator. A T12M chart takes all of the noise out of monthly data deviations that generally mask where the business is really headed. You can measure almost anything with T12M chart, but according to Kramers the most important KPIs to chart are sales, gross margin, operating expenses as percent of sales, and net income.
So, now you are aware of the most important business tools for success. What do you want to build today?
Kent Wilson (PhD) is a business practitioner and leadership specialist. After running companies for 30 years, he now serves as an executive coach with Vistage International and the Nonprofit Leadership Exchange in Colorado Springs. He can be reached at firstname.lastname@example.org.