Three Dashboards You Can’t Live Without

Information Management Special Reports, February 17, 2009

Michael Brooks

"Data, information, knowledge, wisdom" is a well-known hierarchy used in social science to explain how humans evolve in their understanding of the world around them, or, more succinctly, how we know what we know. When applied to the domain of modern business, this model illuminates how a business operation goes from a set of numbers to the decision to increase production 8.5 percent for two quarters, offer 15 percent price discounts to established customers and increase marketing by 10 percent.

Decision-making has always been a critical art in business. BI has been around for decades. The growing sophistication of technology solutions - such as dashboards - can substantially help executives make the best decisions possible by providing accurate, timely and easy-to-comprehend information to transform mere data into business wisdom. This wisdom is particularly critical at a time when businesses face tighter credit markets, smaller customer budgets and an unstable overall economy.

For many executives, the subject of BI is a confusing fog of buzzwords that involve large investments, long projects and disappointing results that fall short of the grand promise. Fortunately, a new generation of dashboard technology can quickly and easily measure key business processes, giving management the insight needed to run a successful organization.

There are many possible deployments of performance dashboards in an enterprise that provide valuable insight. Three are mandatory for any business of any size in any industry: cash flow, revenue stream and cost structure. Dashboards for these three activities can be leveraged by any organization, regardless of whether there is an established BI framework. In fact, the basics of performance dashboards transcend industries and apply to enterprises of all sizes.

Cash Management Dashboard

There is an old proverb that says, "Profit is an illusion, cash flow is fact." Much of the information needed to understand and manage cash flow is buried within financial reports, such as the cash flow statement, income statement and balance sheet. Performance dashboards and advanced data visualization capabilities enable this information to come alive in a way that focuses management’s attention where it’s needed most.

Figure 1 illustrates several key metrics that highlight the health of the company. The first metric shown is the cash balance over time, a fairly straightforward indicator of the company’s position at specific reporting periods.

Figure 1: Key Metrics that Highlight the Health of a Company

Typically, cash is generated or consumed in three ways, from operations, investments and financing activities. Operations is the most important area of day-to-day focus. Moving down the left side of the figure, the next metric is operating cash flow. This number is primarily influenced from sources of cash (net income, cash sales and accounts receivable) that is tied up in inventory to be used to generate future sales and cash that is disbursed to fund operating activities (accounts payable, payroll). In addition, it is important to monitor free cash flow (FCF), which is the operating cash flow minus the amount of capital expenditures. FCF is a measure of how much cash the company generates that is available for expansion, dividends, debt reduction or other uses without having to borrow additional funds. Companies with a high or rising FCF are viewed as healthy and typically generate a higher valuation. At the bottom of the dashboard, we see metrics related to investment and financing activities. Trends should be tracked for all of these metrics over time.

On the upper right side of the dashboard, there are several calculated values that are extremely important to any organization. The first is days cash on hand (DCH), which shows how the enterprise can operate with the current cash in the bank. The cash conversion cycle (CCC) is a measure of management effectiveness that depicts how quickly the funds on hand can be converted into even more cash. This measure is a good barometer that can be tracked over time or against competitors. CCC is a combination of several other measures and is equal to days sales outstanding (DSO) plus inventory days on hand (DIO) minus days payable outstanding (DPO). DSO indicates how many days it will take to convert the sales contained accounts receivable into cash.

For manufacturing, retail and other product-oriented companies, it is also important to track and balance DIO to determine how many days it will take to sell the company’s entire inventory. Generally, lower is better for DSO and DIO, but it is important to maintain a balance. Too little inventory on hand indicates a risk that customer expectations will not be met and sales will suffer, while too much inventory ties up funds.

Lastly, it is important to monitor the amount of cash that will be required to meet current debt obligations. DPO indicates the length of time the company takes to pay its vendors after receiving inventory. The higher this number can be maintained, the better positioned the company is to maximize its investing potential.

To understand how the underlying trends influence the above indicators, the key indicators of accounts receivable, inventory, and accounts payable are displayed on the third line. The final indicators at the bottom of the dashboard highlight the two other sources and uses of cash, financing and investing activities. These metrics help management quickly understand how ongoing changes in these areas impact company liquidity.

Understanding and managing a business’s cash flow or liquidity is the most important function for the management and finance departments. Companies that do this well prosper, while companies that do not suffer or collapse. Cash management dashboards make this vital information available and easy to understand.

Sales Performance Dashboard

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