Whether you’ve always focused on financials in your business and are now feeling the cash demands that come along with rapid growth, or you’ve taken the “ostrich approach” to your company’s budget and stuck your head in the proverbial sand, there’s always room for improvement.
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Make Good Decisions With These Financial Management Tips for Business Owners
Having an intimate and realistic understanding of your organization’s numbers is your responsibility as CEO. Unfortunately, in the absence of quality data… people tend to make things up. This can lead to making potentially dangerous decisions about the future of your business.
The knowledge you glean regarding your financials when the numbers are properly organized and easily understandable will help you make more sound decisions throughout the life of your business. It will affect everything from personnel to product development. It is better to run a company knowing where you have been and where you are headed.
1. Hire an Accounting Team
While there may be areas of your business where it’s okay to save some capital and look for an inexpensive alternative, this is not of those areas. Financials are an aspect of your business that can influence every other area. Take care to hire the best accounting team you can afford.
Your accounting team should provide you with regular forecasting regarding your business, and they will benchmark your company’s results to your industry. You will be provided with a meaningful ratio analysis and understand the true health of your business.
Here are a few tips to make the most out of your financials.
2. Create a Complete Financial Package
At the minimum, your financials should include an income statement (revenue, cost of goods sold, expenses, and profits), a balance sheet (assets, liabilities, and shareholder equity), and a statement of cash flows (operating, investing, and financing cash flows). This information should be presented in an accrual method and (if appropriate for your business) there should be a detailed Work in Progress (WIP) included as well.
In addition, you’ll need to review your credit policy and management as it corresponds to Accounts Receivable.
3. Reports Must Be Timely and Accurate
This information should be created and delivered within a reasonable time frame. For most industries, this is within 2-3 weeks of the close of a period (generally the month), if not sooner. Getting data as close to real time as possible will help you make timely and correct decisions that will create better results and move your business forward.
4. Present Reports in a Trailing Twelve Month Format (TTM)
Also referred to as the Last Twelve Months (LTM), receiving data in this manner will remove seasonality and allow you to quickly spot trends. This should not be confused with a fiscal or calendar year. When you utilize TTM, you won’t have to wait until year-end to understand your current financial health.
5. Share Financials with Important Team Members
Having these numbers is useless if you don’t disseminate them to the people that can influence your organization’s performance. Trust the people that you’ve hired and rely on them to improve the business.
6. Understand Your Predictive Indicators
Cash is a critical fuel to growth, so understanding your business’s cash cycle and how it will change with your intended growth is important. A complete understanding will help you proactively fund growth, and ultimately put less strain on the business (and you).
7. Be Aware of Your Sales Pipeline
When you have an intimate and realistic understanding of your sales pipeline, you will be able to predict your future financials and adjust when necessary. A sales pipeline done well can assist you in forecasting people, plant, equipment, and cash requirements going forward.
When it comes down to it, business is all about the people. The people make the numbers. Hire the best people possible for your company and the numbers will usually work out.
If you aren’t getting quality financial information, or aren’t happy with the story the numbers tell, let’s have a conversation about how to optimize your business.