There is an ever-present silver lining in the clouds that have been hovering over the economy for the past several months. That is, business owners are figuring out how to survive and succeed in the current environment.

The rug that was ripped out from under many businesses affected credit markets in an environment in which credit was a staple of spending and growth. The “spend now, pay later” mentality has come under fire, if not become an unconscionable mode of operation.

Whereas “duck and cover” was the initial reaction of many business owners, they are now dusting themselves off, looking at the road ahead and determining what tools they need to proceed.

Not surprisingly, fundamental financial management has regained the spotlight during these times – noting once again its importance and position as a staple principle of business.

The following is a list of fundamentals business owners should reconsider:

1. Know the financial drivers of your business. Financial statements show the results – or effects – of our business activities. To really understand the business, however, we must consider and manage the causes of those results, the real drivers of the business.

Financial drivers are the “levers and dials” that we can manipulate to impact future financial results. Every business has drivers – some affect cash, others affect profits. They are the independent variables that, if changed, impact financial statements.

That is, these are the reasons why financial performance in a given month is different than what we had anticipated. As an example, Accounts Receivable (A/R) is one of the components of cash. When your A/R Days (the number of days it takes a customer to pay you) decreases, the A/R balance decreases, and cash increases. A/R Days is a driver of cash.

To improve A/R Days, you might look at your credit policy, implement a more punitive late-payment policy or spend more time communicating with customers about their unpaid balances. This is managing the cause, not the effect.

2. Create a driver-based forecast. Rather than just projecting an increase in sales by an arbitrary 5 percent, specify whether units or price will be increasing; these are the drivers of the financial result of “sales.”

Specify the customers or markets you will target and to which you will sell. This will not only force you to consider and plan the strategy behind the numbers, but it will also give you a basis for understanding variances between actual and projected results in subsequent periods.

3. Ensure that your processes and systems adequately support your business. Far too often, we see situations in which an owner is not getting what they want out of their information systems.

From the basics of the setup of the chart of accounts to the functionality of the software being used, the backbone of financial and operational reporting is far too often overlooked. Best case scenario is that a lot of time is being spent in Excel manually inputting data and generating reports and analyses.

Worst case is that the analyses are just not being performed.

4. Create and maintain a process of internal reporting and analysis. Financial planning is not an annual event, but rather an ongoing process and culture within a business. Projections should be thoughtful. Variance analyses should be consistent and insightful. This is how trends are uncovered. This is how disasters are averted. This is how reporting becomes actionable.

5. Stop making the distinction between “the business” and “the numbers.” Strategic planning and financial planning should not be separated. The diligence with which an initial business plan was written should be considered for major topics.

6. Make financial management a more significant portion of the annual review process. This implies that managers and employees should have both financial and non-financial goals. Draw a straight line between an individual’s job description and the financial success of the business.

7. Develop a culture of awareness and accountability. As with many topics, the importance of financial management emanates from the top of the organization down through each employee.

The manner in which managers and their staff people approach accounting and finance is a direct result of how you – the CEO and/or owner – approach the topic. What is important to you becomes important to them.

Projections give context and predictability to financial results. When those results are not what was predicted, you have a blueprint for determining why the results were different and can create an action plan for the future. This can only be done with good projections and reports.

On this road to recovery, there is a focus on the processes through which we operate, value in the fundamentals of financial management, and a premium is placed on the integration between operational and financial strategy.

Without a solid foundation of systems and processes, accurate accounting, and timely reporting, an owner is at a distinct and unnecessary disadvantage.

While one does not have to know debits and credits to be successful, understanding the financial realities of the business is imperative in taking the road to recovery.


Steve Jannicelli is senior business consultant with Moss Adams LLP, 3700 Old Redwood Highway, Suite 200, 707-527-0800 or www.mossadams.com.