In any business there are six phases of financial management that if followed will allow your business to thrive. I’ve determined that if you or any business will work through these phases it will allow you to perform even better in the other areas of alignment: Impact, Revenue Generation, Operations Management, and Organizational Development. And conversely if you do not, the chaos caused will bleed into those other parts of your company.
There have several case studies about businesses that have expanded too quickly without financial controls. This has left the open to fraud & embezzlement in their company. Everyone gets excited about new business…but there’s a cost to new business as well as in continued business.
ESTABLISHING FINANCIAL GOALS
The establishing of financial goals must be done by whomever is casting the vision of the company. Your ability to communicate and establish what you want your team to work toward is critical for strong financial management. You need to do a strategic analysis of your company, and to step back to confirm what you would call a successful completion of your financial goals based on your vision.
What is your strategic goal…or…what is the vision behind your goal? Does your vision maybe lead to a financial goal? Establish financial goals that strategically match your vision and will help you achieve them. Set them in sales. Number of units. Number of projects. Set them with metrics that indicate you’ve been successful. Understand the value, understand your market, understand the good first steps for your team.
Put your goals in writing. Set a goal that is smart. One that is achievable. And ultimately a goal that is understandable.
DEVELOPING CONSISTENT FINANCIAL PROJECTIONS
Once you’ve established your financial goals it is time to define your financial projections. You must map out a plan that demonstrates that your goal is achievable. And in that projection, you need to include areas (revenue, profitability, direct expenditures, outside costs such as accounting, legal, insurance) that may not be a part of your business today, but that must be in place to reach that strategic goal.
If you don’t begin the process of projecting, it will lead to not fully understanding your business and the industry it’s in. So, work hard at creating consistent, achievable projections that match your goals. It doesn’t take much to review someone’s projections to see that those are just numbers on a piece of paper, and that they don’t understand their business model or their industry. Include in your projections all the areas that you know will be a part of your business model for it to be successful at reaching your goal.
BENCHMARKING FOR FINANCIAL PERFORMANCE
Next it is time to benchmark. Benchmarking is the practice of measuring your performance against your goals and projections and secondly against others in your industry or market. Benchmarking allows you to determine if your projected goals are realistic, if they’re achievable and if they truly are an example of what can be accomplished. If they’re not, then you need to stop and reevaluate your projections.
Establish your goals, develop your projections, measure your performance each month.
If you can measure it, then you can get the feedback to apply it to your benchmark!
MAINTAINING STRONG FINANCIAL CONTROLS OF YOUR ORGANIZATION
The phrase “Financial Management” implies that you have financial control of your company. Take the time to create within your organization, a culture of financial control. You’re in a position of leadership because it is your job to cast the vision for your small business to fulfill your vision in order to make an impact.
Oftentimes the CEO treats their small business like it’s their personal bank account. And they spend or manage the resources very haphazardly. Those business owners and leaders who manage their business with clearly defined financial controls become great at their business. And this allows for either significant profitability, growth, and consistency.
These financial controls may be developed by a third party, a consultant, a CPA, or someone that can help guide you in those areas of expenditures, insurance, how you manage the day-to-day cash of the business, and who has access to that cash.
If there are multiple owners, how do you determine distributions?
When do you distribute?
How do you manage the flow of information in and outside of your company?
How do you manage purchasing cards and credit cards?
These are areas you don’t have to be strong in, but these are the areas in which you should establish financial control.
With financial control you can provide comfort and have comfort because they communicate responsibility and ownership.
Do the hard thing, establish financial controls upon yourself and those that work in your organization.
To many people financial reporting is simply the task of sending a statement to their accountant or CPA at the end of the year so taxes can be done. But I encourage you to see it as telling the story of your business through financial reporting. Then when you prepare and present to your bank, to insurance companies, to clients for qualification, RFPs, bids, and to auditors it will have become part of your vision.
Internal reporting is used for strategic management on a regular basis, you need accurate, timely, consistent information; so, you can make the management decisions to perform at a high level and that should be a normal process. If you are not looking at your internal reporting on a regular basis, you are probably deficient in this area and not able to manage well.
With strong internal reporting comes understanding of third-party reporting. Your ability to communicate your numbers and show that you actually understand them shows that you have good financial management. It is imperative that for you to work through those numbers so you can truly understand how your business is performing. You need this reporting to demonstrate that your projections and your goals are consistent and achievable.
Being able to develop robust financial reporting processes and systems allows you to manage strategically.
CASH FLOW MANAGEMENT
Companies that exhibit strong performance in their markets are not sidetracked by the constant worries of cash management. The ability to understand how to manage each daily cash flow item is critical to managing your business at any level. And although we know this, we don’t always prepare for that.
For your business to move forward you will need to understand…
your cash flow cycle
your business and the industry you’re in
the funnel from your first sale or sales opportunity to closing that sale
your operations management execution and getting your product or service delivered
The process of how you bill for that and receive that money
It is going to cost you cash out of your accounts to manage and to provide for these costs before you receive money back for that product or service. And you need to be able to understand that so you can forecast six weeks to six months in advance what your cash will be needed for. I’ve seen many successful businesses with great revenues fail in this area and not be able to come out of the spin of a negative cashflow.
If your business is missing important payment dates, payroll, payroll taxes, etc. these are signs that the business is not financially managed well. Oftentimes it’s not evaluating the impact of your decisions on cash management. So, take time to map out the sales cycle of each sale and how long it will take from that first PO to actual collection. Then take this same approach with your cost and map that out on a weekly basis. Put it in a spreadsheet or something similar to help you identify what cash needs you’re going to have each week.
Once you do that, not only can you prepare for your growth, but then you can go to banks or financial institutions and map that out for them, and they can partner with you on a funding mechanism that best meets your cashflow cycle.
So, take time to focus on these six areas, map them and start measuring them on a daily basis. And if you can perform at a high level in your financial management, you’ll see more opportunities for success in your business.
And you can take THAT to the bank!