Business happens in cycles. Effective financial management requires the establishment of monitoring systems that match each phase. Only through the diligent analysis of key, timely data can a small business owner hope to stay ahead of the curve and grow.
The purpose of this article mini series is to help you set up the framework for receiving financial feedback on a regular basis. You will gain an understanding of what you need to know and when. We will point out the reports you should review and provide guidance to create your own personal reporting system that will allow you to know where you stand at a glance. Regularity is the key to success. In order to succeed in business, like everything else in life, you must commit to creating a habit out of following your plan and being persistent in the face of adversity.
Different aspects of your business operate on different cycles. As a result, we will establish daily, weekly, monthly, quarterly and annual routines. Part 1 focuses on daily and weekly tasks. Part 2 will be published in July's issue and will center on monthly jobs. August's issue will include the final installment of the series and discuss quarterly and annual tasks.
Daily and weekly financial management techniques are short-term focused and emphasize sales and cash flow. These are your lifeblood and must be watched like a hawk to insure enough cash is generated to pay bills, cover payroll and save for future expenditures.
You can start by creating a Daily Cash Report showing your general ledger cash balance and your bank balance. Think of the general ledger as your "true" cash position. When kept up to date, the general ledger reflects all deposits and disbursements. The resultant balance shows what is actually left to spend. The bank balance, on the other hand, reflects only those transactions that have been processed by the bank. A check written today, for example, would reduce your general ledger balance and "reserve" the funds from further use. That same check won't hit your bank account for days or weeks (the exact amount of time depends upon the speed of the mail and how quickly the payee deposits it). Never manage your business by the bank balance because you can never know what checks will be cashed or when. A positive bank balance does not necessarily mean you have money to spend.
Expand your Daily Cash Report to include a snapshot of sales. Include the previous day, month-to-date and year-to-date. Compare the figures to your monthly and annual budget. Be sure to distinguish between cash sales (includes payment by cash, check or credit card) and sales on account. Cash sales will be deposited into your bank account within a couple of days while payment of sales on account is dependent upon the credit terms you extend and how diligent your customers are in paying timely. Having these figures at your fingertips will make it easier to forecast future cash flow and monitor the sales team's effectiveness.
Create a weekly Cash Flow Forecast to determine if your short-term cash needs will be met by normal business operations. Starting with the general ledger cash balance, add the amount of cash you expect to receive in the next seven days. The figure will be derived from the work described in the previous paragraph. In addition, you should create a method of estimating the amount that will be received from clients making payment on their outstanding balance. From this total, subtract the amount of vendor bills and other payments (i.e. payroll, debt payments and equipment purchases) due in the next week. A positive result means you likely have enough money to make it through the week. A negative number means a deficit is impending. To avoid overdrawing your account one or more of the following must be done: collect past due accounts receivable, produce more cash sales, put off paying some bills, tap a line of credit or use a company credit card to pay some bills.
If a significant amount of your sales are on account, then review an Accounts Receivable Aging report weekly. The report indicates who owes money, how much is owed and how old the balance is. Use the information to evaluate your past collection effort and focus your future effort. Unless you offer unusual credit terms or your industry has unique considerations, your accounts should be collected in 30 days or less. An increase in the oldest aging categories may be an indication of problem accounts or an ineffective collection system.
Devote the next 30 days to building your daily and weekly routines. We will build upon these basics to create monthly, quarterly and annual systems which will be discussed in the next issue of Mindful Musings.
