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.