Think about all of the wonderful things you can really dig in to: a big piece of chocolate lava cake, a good book, hot sand on a summer day, your financials. Well, at least it’s better for you than the cake. In fact, one of the biggest favors you can do for your business and your sanity is get involved – and stay involved – with your business financials.
How do you get a clear line of sight into your financials?
Here’s the challenge: reports can quickly snowball into an overwhelming pile of, to use a high-level financial term, mumbo jumbo. You may not know where to look, which documents you need, what vital information to extract, or what to do with it. Use the following strategies to conduct a clear, accurate, and informative assessment of your financial state.
#1. Monitor Changes Year-Over-Year
What are you looking for? How do expenses, such as materials or services, affect your company’s bottom line? Are there drops or spikes in revenue? What has changed?
What can you do with this information? Use this insight to budget for the year ahead. Annual reports not only provide an overview of your company’s financial wellbeing from year-to-year, but also a helpful strategic planning tool.
#2. Learn from Your History
What are you looking for? Look to the past to plan for the future. Scour your history for inefficiencies and potential cost-saving measures. Identify areas for change. Remember, even if a strategy, technique, process, or system has worked in the past, it doesn’t mean it can translate to future success. Which practices do you need to jettison, which mistakes do you need to avoid, and which approaches are worth continuing?
What can you do with this information? By keeping tabs on the factors that have helped your business succeed historically, you have a wealth, pun intended, of data to make informed decisions and implement sound strategies.
#3. Pay Attention to Monthly Snapshots
What are you looking for? When prepared properly, monthly reports contain an accurate diagnosis of your company’s financial health. Look for signs of trouble before they have a chance to metastasize.
Also keep on top of seasonal or predictable fluctuations. Do you, for instance, tend to do more business during the holiday season? During summer? Do you have a spike in expenses, such as advertising costs or fuel needs, during particular months? While you’re at it, take a look at your run rates. This annualized data can help you extrapolate revenue for the year and tell you more about the current state of your business.
What can you do with this information? By tracking and monitoring revenue and expense trends, you can stay on top of cash flow and working capital needs, as well as plan for the future. These reports can help you identify which months are most profitable and plan for those that are not.
#4. Stay on Top of Aged Accounts Receivable and Aged Accounts Payable
What are you looking for? Look at your accounts receivable: What are the balances owed to you by customers? Are receivables collected in a timely manner? For your aged accounts payable report: what do you owe to your suppliers, vendors, and lenders?
What can you do with this information? This will give you a clear, maybe stark, picture of what you owe versus what you are owed. By examining your accounts receivable, you can determine whether you are taking credit risks that are too great. If Customer X is chronically late with payment, is the cost of doing business with them greater than the reward? Do you clearly set out the terms of payment for clients and customers? What happens when payment is late or nonexistent?
What if you find that you are the Customer X for your suppliers, vendors, or lenders? It can be a difficult realization, but a starting point for a new financial strategy and an opportunity to establish your business on more solid ground.
#5. Whip Your Financial Team into Shape
Whether you have a single bookkeeper or an entire financial team, make sure they have the expertise and skill necessary to meet the challenges of a growth company. Can they grow with you? Demand timely, accurate reports – and explanations. What does this data mean? For every report, ask, “What am I looking for?” and “What can I do with this information?”
Most entrepreneurial CEOs don’t have a strong financial background. That is an obstacle that you can overcome with a good financial team, part-time CFO, and/or high-level financial consultants. Financials don’t have to be intimidating or overwhelming: know what to look for and just dig in.