“I Don’t Know” is the Wrong Financial Answer

“How fast are we going?” I asked.

She glanced down at the speedometer and said “140.”

I gulped, tightened my seatbelt, and decided I’d better stop asking her questions until we slowed down.

You need to know

She knows the speed because the speedometer tells her. She glances quickly and never stops processing what’s happening in front of us. The dashboard is well positioned, and organized so she can barely look and instantly know. The information is essential–a matter of life and death, you might say–so it’s critical that the design work smoothly for delivering the information required.

Do you know the essential information?

When I ask for essential information from lawyers who are driving law firms, the answer is far too often, “I don’t know,” usually followed up with, “I can check.”

Or worse: “I’ll get the report in a few weeks and I can let you know then.”

My questions cover a range of essential information:

  • How was the revenue last month?
  • How many website visitors did you have?
  • How many initial consultations?
  • How many new clients?
  • How many hours were billed by the associates?
  • How many online reviews posted?
  • How much did you spend on marketing? Payroll? Other expenses?
  • What’s your gross margin?
  • What was the profit last month?
  • What’s your net worth?
  • What are the trends? Are these numbers up? Down? Sideways?

I don’t know means you lose

Many times, when I ask the questions, I get blank, empty, hollow, useless stares instead of answers.

If you don’t know your numbers, you can’t make the decisions required to run the business. Running a business on last month’s info is like driving the car with last month’s speedometer reading. Not good.

Even worse is trying to run the business with last month’s data and no longer-term context. Are we speeding up or slowing down? Are we headed in the right direction or are we going the wrong way?

Most of the law firm data I see, in addition to being outdated, is for just a single month. If I’m being optimistic, it might include year-to-date data. Year-to-date data, in the spring, isn’t much data and it’s not of much use.

It’s all good until the economy tanks

I’ve got a friend who’s doing well. She’s doing $1,300,000 per year as a solo practitioner with a handful of assistants. Life is good. She just moved into a beautiful new space, she’s buying all kinds of marketing services, and she’s feeling successful.

She has no idea where the money is coming from, where it’s going, or much of anything about what’s happening financially. She’s happy with her ignorance because she’s making money.

But fast forward to the next economic downturn–whether it’s the entire economy or just her practice area–and she’s going to get hurt.

Knowledge is power. Ignorance is failure. Ignorance gets painful–fast.

When we lack decent data–when we drive without a speedometer, a fuel gauge, or other indicators–we don’t realize it when things go wrong. We’re still busy, rushing around getting things done, and we have no way to know that the revenues have slowed, while the expenses have increased and the profits are headed into negative territory.

Suddenly, profits turn to losses. The clients stop paying. The credit line kicks in. Debt piles up, bills go unpaid, and our lack of information hits us with punishing speed.

Without a dashboard, you have no way of knowing that things are changing, or whether they’re changing in a good or bad direction. By the time you realize that corrective action is necessary, you’re 6 months too late.

Build your own dashboard

You need a dashboard. It needs to be customized for you. It needs to suit your particular needs and your approach to processing information.

Many lawyers go out and buy a nifty business dashboard software product when they decide to tackle the problem of getting real-time information.

I’ll admit that there are many impressive products on the market. I’m guessing you’ll end up using one at some point.

But don’t do it yet.

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Don’t buy the cool new toy. Start slowly and grow into the more sophisticated products.

You’re learning to drive, and you need a beaten-up old Toyota while you’re operating with a learner’s permit. Buy the Tesla with autopilot after you get a little experience. Right now, you need a feel for the road, you need the noise coming through the floor board, you need to experience the movement in your fingers and buttocks, you need to control the car yourself before you hand it off to the computer.

Use Google Sheets or Excel. Do it the old fashioned way. Build it one step at a time before you get fancy. Work with your bookkeeper and turn your numbers into graphs that will suit your brain’s way of processing information. Turn columns of numbers into trailing-twelve-month graphs. Think through ways to combine different parts of your business into a single number or ratio. Look for indicators which predict the future, rather than simply reporting on the past.

You need to be able to connect the dots between the information you receive and the action you need to take in order to correct course. That comes from knowing the data and where it’s coming from, and from creating graphs that you can understand and quickly comprehend. The fancy products give you more than you need and deliver it before you’re ready for it.

Know your speed

As your dashboard comes together, you’ll start to see the patterns. You’ll realize that stepping on the gas causes the business to speed up. You’ll notice that some activities result in things slowing down. You’ll gain control over the business as you observe the relationship between the inputs and the outputs.

Before long, you’ll be able to glance at the dashboard, know the speed of the business, and make adjustments. You’ll start managing the business by the numbers, rather than being forced to guess because you don’t have the appropriate information for making decisions.

Your business will hum along at the speed you decide is appropriate. You’ll know where you’re going, which route to follow, and how long it’s going to be before you arrive.

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