A financial dashboard is more than just a great visual—it should help businesses with making decisions. In part two of our series on financial dashboards, we'll explore how you can use this important tool to make more effective decisions in your business planning. If you missed it, in part one we covered best practices for building dashboards.
Effective decision making is at the core of every successful business. Running a company is about solving problems quickly and intelligently while under pressure, with limited resources.
Making decisions in the heat of the moment, or going with your gut, inevitably leads to failure. Businesses need a set of guidelines, data points and analytical tools to navigate all of the novel situations that they face daily.
This article will explain why it’s so difficult to make good decisions consistently without the proper tools and how a financial dashboard can vastly improve your decision making.
Where we go wrong in decision making
Humans are generally poor decision makers. The nature of our inherent psychology makes it difficult for us to maintain objectivity and rationality in the face of pressure and emotion (which both are unavoidable for business owners).
Chip and Dan Heath, two experts on human psychology, have presented an excellent framework for the challenges we face when it comes to decision making. Here are the four critical limitations to overcome:
- 1. Narrow framing:
It’s all too common for us to look at our decisions through a binary lens. We focus intensely on the handful of options presented to us upon first glance and have a difficult time taking a step back to study the other choices available.
- 2. Confirmation bias:
- 3. Short-term emotion:
Humans have evolved to emphasize the short-term over the long-term. We usually place far more importance on how we’ll feel about a decision ten minutes after we’ve made than how we’ll feel ten years afterward, often to our detriment.
- 4. Overconfidence:
These inherent flaws can often lead to significant problems for your business. That issue is compounded by the fact that when we can’t make good decisions quickly, we often delay making any decision at all. And waiting to address problems can end up costing your company far more than it would have had the issue been addressed at the proper time.
Fortunately, leveraging data to guide decision making can help alleviate these problems.
A data-driven approach to decision making with a financial dashboard
A comprehensive, data-driven approach is the perfect antidote to all the flaws in human decision making. It greatly increases the efficiency of the process in three ways:
Increases objectivity: Data helps minimize the impact of the inherent biases we all have by quantifying each element. It’s a lot easier to rely on facts than on your instincts, especially when the data is measurable and organized.
Broadens perspective: Without data analysis, it can be easy to focus on the first handful of possible options presented. But having a comprehensive data set allows you to see the big picture instead of focusing solely on your initial responses.
Hastens execution: One problem with a lack of quantifiable decision factors is the friction it creates, which slows down the entire process. If you can set data-driven rules to automate even your simplest decisions, you’ll see significant improvements in the speed of your business processes.But remember, although data can certainly provide insight into the best strategies, at the end of the day, you still get to make the final call. The analysis is just a guide to aid you in your decision-making processes.
Let’s take a look at an example:
One big decision that business owners inevitably have to make is whether or not to begin the hiring process since most business models require multiple employees to scale up. And timing that decision properly can make or break your business.
If you hire too soon, you may not be able to support the expense. If you hire too late, you’ll become overwhelmed by demand or have to turn work away.
Unfortunately, many businesses time this decision incorrectly. When they begin to feel overwhelmed, they desperately look to expand their team and end up hiring someone who may or may not be the right fit.
Instead, you should study the growth of your monthly cash flows and forecast the expected profit for each new employee, which will help you avoid hiring too soon or too late.
Even a venture-backed company with loads of cash needs a data-driven approach to hiring to prevent excessive cash burn.
Of course, you can’t predict everything, which means that mistakes will happen. But even when you make decisions that don’t work out as well as you’d initially hoped, a financial dashboard can still turn those into a net positive.
Businesses with a robust financial analysis and budgeting system can analyze their data to find the cause and effect of those mistakes, learn from them, and apply their new knowledge to improve their decisions going forward.
Using a financial dashboard to improve decision making
Next, let’s discuss the practical ways to use a dashboard to improve your decision making.
One of the best ways to do this is to define and track the key performance indicators (KPIs) that are most relevant for your business.
The best KPIs are hyper-specific, and tracking them will provide actionable insight for you as a business leader. For example:
Revenue per employee: In our hiring example above, we noted that it’s important to make sure your employees are a justifiable expense. Payroll costs are often the most expensive part of doing business, and you’ll need to understand exactly what your return on that investment will be.Acquisition costs/revenue per customer: Every business should be using multiple strategies to generate leads and attract new customers. To make sure that you’re using the most effective avenues, you should be tracking the price of acquiring each customer and comparing it to the revenue that they generate over time. Deciding to shift your lead generation tactics is easy if you can verify that the ratio between the expense and subsequent revenue is unfavorable.
Quote-to-close ratio: When you’re deciding how to price your product or service, monitor the rate at which your leads either balk or buy after getting a quote. If you’re losing more than you’re comfortable with, especially when the lead is so deep into your sales funnel, you may need to lower your prices. Alternatively, if everyone is jumping at your current rates, you may need to raise them.
Besides your most important KPIs, make sure that your dashboard is tracking your cash flows and cash on hand. Every business is concerned with their cash flows, and every decision needs to be made in light of your current resources. If your business only has a few months left of cash-flow runway, that will seriously influence which expenses will get priority.
Jirav’s financial dashboard software compiles all of your KPIs and financial metrics in one convenient place. It allows you to quickly visualize your company’s data, make projections, and use those insights to make better decisions.
Chat with an expert today to see all the ways that Jirav can help you improve your financial decision making.
