When was the last time you sat down and looked at the finances in your business. If you’re like most business owners, you probably tend to avoid this for as long as possible.
Dealing with the financial side may be stressful, but having financial control brings harmony and stability to your business. What so many business owners fail to recognize is that every business decision has financial consequences. Not being aware of those consequences may cause chaos.
Regardless of the state of your finances today — whether your business is making millions or drowning in debt — understanding your finances and making them work for you is key to financial control in your business.
Here are the 5 steps to financial control.
The first step is having current financial information.
Let’s face it. You’ll need financial information for your business sooner or later. You’ll need it at tax time, you’ll need it to get financing, and you’ll need it to make sound business decisions. Waiting until the last minute can be overwhelming and making decisions based on last year’s numbers can spell disaster.
It’s important to record financial information every month. I don’t recommend business owners undertake this task themselves. Software programs make bookkeeping and many accounting functions very efficient. And there are reasonably priced options and alternatives available to handle this task. A business owner’s time is too valuable and should be used more strategically.
The important point here is that the financial data is organized and up to date.
The next step is producing financial statements every month.
Financial statements summarize and interpret the financial data that’s been entered. Most accounting software programs generate financial statements with a click of a mouse. It’s that simple. But it’s extremely important that all financial information is entered.
For our purposes, there are three primary financial statements: the Balance Sheet, the Income Statement and the Cash Flow Statement. Each financial statement looks at the business from a different perspective. Each tells a different story. But together they give a big picture perspective of the business’s financial health.
You may be thinking, why every month. Because the revenues and expenses of a business fluctuate month to month. Monthly financials are more detailed and provide valuable insight that helps a business owner make better decisions. Without monthly financial statements, it’s difficult to forecast cash needs, improve the bottom line, protect against risk of loss, or plan strategically.
The next step is planning.
As I mentioned in a previous Blog, there are different business plans for different purposes. The type of business planning we’re discussing here is strategic planning for internal purposes. Going through the exercise of preparing a business plan gives you focus, clarity and a big picture perspective of the business. It doesn’t have to be perfect nor follow a certain format.
Planning begins with your vision for the business and how you hope to achieve that vision. Long term goals and milestones are developed for each segment of the business. The process also includes incorporating financial information, preparing financial projections and setting key financial indicators to follow your progress.
mind this business plan is not cast in stone. A business evolves over
time and may not perform as anticipated. Therefore, the plan may need
to be adjusted and updated from time to time.
Next is monitoring the progress.
Monitoring financial results monthly over a period of time tells you whether you are on track to reach your goals. It acts as an early warning indicator if the business is not performing as planned. This gives a business owner time and an opportunity to make adjustments in the business before a serious decline occurs.
Monthly reviews also do something else that is hugely beneficial to a business owner. It gives a business owner focus, insight and accountability. We all know these three qualities accelerate the achievement of goals – no matter what those goals may be.
Managing Cash Flow
The final step is managing cash flow.
The golden rule in business is “Cash is King”. Every CEO knows managing cash is one of the highest priorities in business. And for small business owners it’s a particular challenge. They have less resources and more pressure. Cash is usually tight. One small “hiccup” can put a financial strain on the business and disrupt operations.
The only way to manage cash effectively is to have meaningful cash flow projections. And you can’t have realistic cash flow projections without monthly cash flow statements. The numbers on the prior monthly cash flow statements are the starting point. They are an indication of what cash flow may be in the coming months. But they are only a starting point.
Preparing realistic cash flow projections requires input from the business owner. A business owner’s knowledge of the business and impending changes must be incorporated into the historical numbers. Here is where a business owner should spend some quality time. It’ll make a difference.
These are the 5 steps to financial control in business. Each step is necessary, and each builds on the other. For example,
- You can’t manage cash efficiently unless you’re monitoring monthly financial results and the accuracy of the cash flow projections.
- You can’t monitor financial results and progress towards your goals unless you have a strategic plan and have set out goals and projections.
- You can’t develop a strategic plan with realistic goals and projections if you don’t have monthly financial statements.
- And you can’t generate monthly financial statements unless the financial information is entered every month.
Last Word – My Thoughts
Setting up a financial system and achieving financial control in business is not difficult. You don’t have to be a finance expert or run numbers or understand complicated accounting principles. You simply have to have a streamlined system in place and be aware of what’s happening financially in your business. That’s what makes a successful business owner / CEO.
And it doesn’t have to be time-consuming for you either. A virtual CFO can analyze the financial data, monitor cash flow, track progress towards your goals, identify variances in performance, anticipate financial risks and potential losses. Then she can summarize and discuss it with you each month. That’s what a CFO does. All you have to do is spend an hour or so a month with your CFO to become the successful CEO you are meant to be.
Remember, financial control is about economic empowerment. Embrace it!