THE AUTHOR: Mike Peotroff the VP of Corporate Sales and Marketing for NOW CFO.
It’s 6:00pm and most of your employees have gone home for the day. You find yourself sitting in your office with a moment to ponder on the business you started and you’re thinking about the roller coaster that has been your life for the last 3 years. Taking the leap to leave your stable job and pursue your passion was one of the most terrifying things you’ve ever done. You maxed out your credit cards, you took out a second mortgage and even borrowed some money from a wealthy relative.
Finally, you are starting to feel like this dream of yours just might work. Revenues are growing, the market is responding positively to your products and services, employees are becoming believers and there is light at the end of the tunnel. However, there is something that keeps nagging you. Your intuition tells you something is missing. Too often, you feel like there is a lack of control. Too many decisions are being made by your “gut” and so far, you’ve been lucky. But you know that one or two bad decisions and that light at the end of the tunnel might just be a freight train, not the light of bliss and glory you are seeking.
The scenario above is spot on for many business owners. To some degree or another, it is true for anyone who runs a company, be it as a founder, owner, CEO, or president, especially in the $2M-$20M range. Too often, critical decisions are made without the right data to know if those decisions are good or bad. How clear is your business windshield? Do you feel like you are driving your business down the road in a rain storm without any wipers? Maybe you have a “sense” of where the road is, but you know you are only one or two bad decisions away from driving your business into the abyss.
Mr. Buffett’s comment is especially true when it comes to financial data. Typically, accounting data is great at telling us what happened last week, last month, last quarter and last year. But smart business leaders have learned how to use their financial data to look forward, thus creating “financial visibility” or in other words, turning on the “business windshield wipers.”
5 Critical Financial Mistakes Small Business Make
1. The Belief that because we have a day-to-day bookkeeper and a CPA doing our taxes “we are good.”
This is probably the most common mistake newer businesses make. Thinking that all is well because the bookkeeping is being handled, and taxes are getting filed, demonstrates a lack of understanding of the difference between “financial accounting” and “management accounting.” Financial accounting is great for looking backwards and providing historical data to outside stakeholders like the IRS, banks, family members that lent you money, etc. Management accounting is the practice of taking historical financial data and using it to run the business. Examples of the two are below:
Smart business leaders understand the importance of leveraging financial data to manage the business. Having a great bookkeeper and filing your taxes on time are certainly important. However, companies that stop here are missing out on some of the most powerful tools a business leader needs to be a proficient steward of the business.
2. Failure to establish budgets and track variances for each department
At the beginning of each year, many businesses estimate how much revenue they will bring in and how much they will spend. The money left over determines their profit. Smart business leasers do just the opposite. First of all, they determine how much profit they want to make. Then they determine how much revenue they need to bring in and how much they can spend to hit their desired target. The equations look like this:
Once a company has determined their target profit for the year, they can determine a realistic goal for revenue and then know how much they can spend to reach their objective. The expense number is then divvied up amongst the departments that drive the business, i.e., sales, marketing, IT, operations, HR, etc. Each department head is given their annual budget and expected to keep their spending within those parameters.
Budget Variance Reporting: Once your annual budgets are established for each department, there should be a frequent review to track how much your teams are spending compared to their budgets. This process, also known as budget variance reporting, will allow you to make important decisions with far greater confidence. The next time one of your department heads want to make a big purchase, the two of you can review the budget variance report and make the decision based on real data.
3. Taking too long to close out the books each month
The key to financial visibility is to have financial data that is accurate, timely, relevant and insightful. If financial data takes 3 months before it can be used, then it is no longer relevant. If your data is inaccurate, then you can’t gain any insight. A best practice is to close out your monthly books by the 7th of the following month. In order to accurately close your books by the 7th, you need to have the right internal processes in place. Once these processes are established, your bookkeeping team will be able to mold their activities around the monthly close.
4. Cash flow is based on whether or not you can cover the next payroll cycle
One of the most important pieces of data a business leader can have is a 13-week rolling cash flow analysis. Why 13 weeks? 13 weeks = 1 quarter. You should always know your cash position for at least 1 quarter in advance and you should know that every single week. Consider this – if you know you will be short on cash 13 weeks from now, there are a number of things you can do to improve your cash position. You could:
– Delay hiring some of the staff you were planning to bring on board
– Land a big contract and have them pay up front
– Put extra effort into cleaning up delinquent customer accounts
– Negotiate different terms with a vendor or two
– Delay the purchase of equipment or technology you have on your roadmap
– Put together a bank package and secure a line of credit
– Eliminate head-count (certainly a less favorable option)
– Secure bridge financing (expensive, but still an option)
On the contrary, if you know you will be short for your next payroll, most of the suggestions listed above are no longer options. Now you are limited to asking your employees to defer their pay or you can always have another meeting with your wealthy relative. Understanding your cash position 13 week out should be one of the stables of your business. If you don’t have this visibility today, you should make it your number one priority!
5. Inability to view key financial data on a weekly basis
Now that you have done all of the above, you are ready to create a weekly one-page report card that shows you the most important financial indicators for your business. For example, a dental practice that has multiple offices might have standard items like revenue, collections and cash flow. But specific to their business, they might want to see things like revenue per chair, or revenue per hygienist. The key is to determine the key indicators for your business and to review them weekly. Some of these indicators might include:
i. Budget updates/variances
ii. DSO (Days Sales Outstanding, or how fast you are collecting your money)
iv. Payroll expenses
v. Upcoming expenses (large purchases like equipment, trade shows, furniture/computers, machinery, etc.
Your weekly staff meeting can become far more powerful and insightful if you have a weekly report card to review with your team. Important decisions can now be made with data and not your gut instincts. Internal stakeholders can gain a better understanding of the challenges and opportunities across the business.
Financial Visibility = Smart Business Decisions
When it comes to running your business, give your gut a break. Start making important decisions with the financial data you already have at your fingertips. Your bookkeeper is already putting this data into your accounting system. It just needs to be put in a format that will give you the powerful decision making capability enjoyed by Captains of Industry.
If you want to find out what it would take to turn on your business windshield wipers, call NOW CFO today and schedule a complimentary 2-hour whiteboard session!
About NOW CFO
NOW CFO is headquartered in Salt Lake City, and has offices in 19 cities, servicing Washington, Oregon, California, Arizona, Utah, Colorado, Texas, Tennessee and Minnesota. NOW CFO provides accounting and finance consulting services through expert consultants that work onsite to ensure a complete understanding of the client’s business. NOW CFO services include part-time CFO and controller services up to large project-based engagements for due diligence, system integration and audit-prep.