Picture the firm as a car racing down the road, pedal to the metal.
A torrent of information rushes at us as we drive.
We can see where we’re going by looking out the front windshield. That’s our immediate future.
We can see where we are right this moment by looking to either side. The present.
And we can see where we’ve been by looking at the rearview morror. Our past.
Okay, that’s a cute analogy, you say—but how does it help us manage the firm?
Just as when driving a car, we must use all of that information together about the past, present, and future to help us steer our firm in the direction we want it to go.
There are some simple tools we can use to give us these views to the front, the side, or to the back. They are most helpful when taken together, just as we must process all of that information while driving.
How can we know right now where our firm is headed, financially? We can do this with financial projection, or forecasting, as we discussed last week. It’s easy—we’ll begin to work on this in more detail next week. And, with that tool, we can easily forecast profitability.
No data is more critical to managing the firm than this.
We know where we are now by looking at the firm’s most current financial report. This data gets old quickly as we fly down the road, so it must be reviewed and absorbed immediately. It tells us whether we are in the fast lane, the slow lane, or headed for the ditch.
In particular, we must examine the firm’s Income Statement for each billing period, as it is completed.
We’ll talk more about basic financial reporting a bit later.
Where we’ve been is crystal clear from our financial history. We should be making a deliberate effort to collect and record this history, and look at it often. A forecast history tool can give us some real insights, so we’ll discuss that in the near future. It doesn’t take long for patterns to emerge. These patterns, like roadmaps, are extremely useful.
And bear with me here– there’s still more to my car analogy.
As we’re driving along, one other critical source of data is our instrument panel.
Let’s imagine that data as our firm’s Key Indicators. They’re fun to calculate and think about. Check them out.