Dashboards are a great tool. In one page of graphs and ratios a talented finance executive can quickly spot operational inefficiencies that may be hidden in the balance sheet or income statement. Recently I saw my ratios of accounts payable to inventory drop which was surprising since I had moved all my top suppliers to 45-60 day terms from standard 30 day terms in 2009. While this provided great cashflow in the midst of the economic downturn and cover for the customers that were stretching out their receivables to my company, over the past two years all these suppliers quietly moved their terms back to 30 days without a call or letter to purchasing or accounting.
This got me thinking about a new tool for CFO's. Do I have an initiative dashboard to measure the staying power of cash flow initiatives or even profit initiatives? The inherant assumption is that when an initiative is developed it has unique characteristics beyond the ratios it will impact. For instance, increasing vendor payment terms will increase payables and provide short term cash flow but if payables are increasing due to growth and cash flow is shrinking due to other reasons you can spend a lot of time tracking down the multiple variables that impact the ratios before arriving at the conclusion that an initiative reversed itself. In this example, the unique characteristics of this initiative is the percent spend of the vendors that originally agreed to longer payment terms. Some of those vendors were replaced which lowered the importance of their longer terms. The other characteristic is the payment terms themselves. By creating a dashboard of the terms for top 20 vendors and the percent of total spend that they represent, I have a much clearer understanding of how to revisit this initiative with purchasing. Also, the value of iniative is timeliness and trying to cutoff the reversals before a supplier becomes too entrenched in that new business practice is important to your negotiating leverage.
I hope this one example will inspire you to look back at your best ideas and generate a initiative dashboard because it is much easier to maintain good business practices and to generate a great new idea and push your organization and your customer/supplier to implement.
It is interesting that some metrics can hide the impact while others can highlight it. Often times it seems like making an impact on one metric has unintended consequences somewhere else. In one of my blog posts I likened this to squeezing a balloon.
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