Financial controls are heralded by many business people as the "be all end all" for the success and profitability of all ventures. Yet when asked "What are good financial controls?" you will get many different answers, depending who you talk to. Auditors might say things like "Are all journal entries approved or is there a proper segregation of duties?" "Finance professionals, like Controllers, might answer "Have the books been closed consistently with an accurate cut off?" Other people, such as educators or lenders, would probably have different objectives. These responses are all important, particularly to these individual constituencies, but will not be the subject of this article.
This article will provide a couple of overall controls that business people can implement with relative ease to improve the financial visability of their business. Many business owners or executives spend most of their time getting customer orders, completing the work, and satisfying the client. Truly, these activities are the most important, however without the timely understanding of the company's finances, adverse situations may be missed or discovered too late. Implementing these four actions will certainly give you more information and can expose unpleasant surprises earlier, providing more time for you to do what you do best: Manage the business.
1. Develop a written one-year time-phased business plan. With modern computer spread sheet programs, this projection can be easily assembled. It should be in sufficient detail to include the major line items in the monthly financial statement package. Of course, the major line items should isolate the important customer orders, products, expenses, wages, etc. This effort is extremely important in businesses that have order backlog greater than one month or seasonality in business and/or expense volume. For many small businesses a cash forecast would suffice, however if the business is larger or more complex a profit/loss statement and balance sheet should also be included. This spreadsheet could be assembled by the company's chief accountant, outside bookkeeping service, or part time CFO. Top management of the Company's should own and understand the business plan as it will be this tool used to understand the business performance and manage its future.
2. Close accounts quickly, reconcile, review, and prepare financials, compared to business plan. The best-run large or small businesses of our time now monitor their books daily and issue financial statements within several days of month end. Whether General Electric Corporation or Sam's drycleaner LLC, the reasoning is the same. Corporate leadership wants to know how they did against their plan, take advantage of opportunities, and make adjustments where necessary. Operating results should be reviewed for both the current month and year to date. Large activities in shipments, disbursements, or collections in one month are best interpreted by reviewing against the year to date plan. For example, a large sales month might be the result of not making the previous 3 month's schedule shipments. Good news about completing the customer order but not reflective of a higher than plan volume. (NOTE: I like your use of examples, I would like more.) Growth in accounts receivable could result from increased sales or customer payments not being received or mis-posted cash receipts.
3. Pay attention to forward looking key business drivers/events and take action accordingly. Whether politicians, educators, parents, or business people they all agree on the importance of knowledge particularly early knowledge. Suppose you were the CEO of a plastics molder providing cases for cell phones. You know the cell phone assembly company has a revolutionary new product approved which will dwarf your current activities with them included in your current business plan. What action should you take to gain the most business? You might need to adjust the capacity of your business (plant size, headcount, etc.). What if your current senior bank loan paying 6 percent interest was to expire on December 31st and you knew the current commercial rate was 4 percent. What should you do to lower your operating expenses? Contact your banker immediately to open discussions to renegotiate a new loan with a lower rate. Good operating leaders are knowledgeable with their customers, suppliers, contracts, etc., not just for the current but perhaps more importantly the future. Knowledge of the future enables timely and profitable business decisions.
4. Cash is always "king," but it should be protected like your first born. "I've got plenty of cash in the bank. I think I'll remodel the offices or give a bonus." The size of the bank is just one component of cash funds available. Even more important are current liabilities and future commitments, anticipated forward business levels, tax deposits, etc. "Great news, we have $20,000 more cash than I thought. Guess we can get that new computer system." If it walks like a duck, quacks like a duck, it's probably a duck! Better reconcile that account before you buy that computer or make any other decisions. If your business is growing quickly, managing accounts receivable to match your accounts payable can be crucial. The same is true if your business is shrinking. Businesses can fail or succeed more easily on cash flow management than any other factor.
SCORE provides free and confidential business advice to entrepreneurs working to start new businesses and grow existing businesses in northern Nevada. The mission of SCORE is to help local entrepreneurs and businesses become a vital part of the northern Nevada business community. Look us up at www.score-reno.org or call us at 784-4436 to schedule an appointment.
Ken Kreider is the president of WaCon, Inc., which provides turnaround/special situation interim finance and operations consulting. He also is a member of SCORE in Reno. He has significant experience in manufacturing, distribution, defense, consumer products, and equipment rental businesses. He and his wife, Linda, recently moved to Reno from their long time home of Park City, Utah. Contact him at firstname.lastname@example.org or 435-840-1428.