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As a manager, it is critical to correctly measure how your company is performing. It is the first step in any control or improvement process. That understanding will guide your focus and allocation of resources. Performance can be measured in many ways and managers need to focus on both internal and external scorecards. They must link day-to-day activities with the bigger picture.

Internally, companies often focus on new product deliveries or efficiency improvements. First, they must more readily align with the day-to-day activities of the personnel. People can grasp what they need to do and how they fit into the bigger picture. Second, success on these indicators will usually drive success on the external scorecards.

Externally, the scorecards are financial and answer a few fundamental questions - is the company profitable, does it have sufficient reserves to sustain operations and does it generate cash? Managers do not need to be experts in accounting, but they do need to be literate. Three primary financial statements answer the above questions.

n Income statement

n Balance sheet

n Cash-flow statement

The income statement summarises the revenue, expenses and resulting income (profit) for a period of time, usually a quarter or year. The expenses are usually segregated between cost of goods sold (what it costs to produce a product for sale) and operating costs (what it costs to design and sell the product). This statement gets most of the publicity because it is the accounting department's way of answering the most basic business question - "Is the business profitable?". However, it does not answer a fundamental question - "Can the company pay its bills next month?"

The balance sheet summarises the company's assets (cash, IOUs, inventory and equipment), liabilities (bills it must pay) and owner's equity for a snapshot in time, usually the end of a quarter or year. It answers the second fundamental question - "Does the company have sufficient reserves to sustain ongoing operations and can it pay its bills?". In this context, the assets are not equally valued. The key here is cash. Does the company have sufficient cash to pay its near-term bills?

The cash-flow statement measures how much cash the company is generating and how it is using this cash. Usually, the cash flow is classified into operating, investing and financing categories. It answers the third fundamental question - "Does the company generate cash through its operating activities?" Not only does cash pay the bills, but it also can be used to invest in the future or pay the owners.

Therefore, managers must link the day-to-day activities of their team with the bigger picture. A solid understanding of the internal and financial scorecards is key to communicating that linkage.