In working with small business owners over the years, I have seen a wide range of success and failure. The businesses that have shown the most potential for success have the right tools in their financial toolbox that allow them to quickly make necessary financial decisions. Here is a list of the items that should be in your financial toolbox:
- Accounting package. Your accounting package should provide the information you need quickly and in a format you understand. While some are easier to use than others, your team members that are responsible for inputting and preparing the information need to have the appropriate training.
- Budget. For budgeting purposes you should focus on the general and administrative costs. These costs are generally fixed and/or are consistent month in and month out. In other words, you incur these costs for simply opening your doors every day. Don’t get caught up in sales forecasts and estimating margins, though these are other useful tools, they are not budgets. Your budget should help you focus on minimizing the costs that you can control.
- Sales forecast and margins. Once you know your operating budget, then you can determine how much you need to make in order to breakeven. This is where it’s extremely important to understand your costs for making your goods or providing your service. While the market most likely drives your sales price, it’s impossible to understand how efficient you are unless you understand your true costs of sales. Your sales forecast is then a simple matter of determining how much you need to sell given your operating budget, sales price and costs of sales.
- Cash flow projection. The cash flow projection is one of the most useful, yet most underutilized tools in small business. It allows you to track your billings and planned collections and compare them to your vendor invoices and planned payment dates. A cash flow projection is a simple exercise in plotting these pieces of information on a calendar so that you can identify peaks and valleys in cash flow. This will tell you when you need to get on the phone with customers to push collections, or call your banker to make sure appropriate credit facilities are in place.
- Key performance indicators (KPIs). KPIs are the financial ratios and financial balances that are instrumental in helping you make your financial decisions. Each industry has a set of KPIs that are most critical to business success. You should consult with your trusted advisor to determine which KPIs are most important to your business.
- Dashboard. This is a simple report that summarizes the KPIs in an easy-to-read format. Just like the dashboard in your car, it gives you the pertinent information you need to drive your business. Most off-the-shelf, canned accounting packages have a dashboard that can be modified to suit your needs. More sophisticated accounting packages may require the use of a report writer software or human interface to prepare the dashboard.
- Trusted advisors. You are not alone. Surround yourself with quality professionals. Areas for consideration include accountants, attorneys, surety professionals, bankers, human resources and information technology professionals. These professionals are in their respective industries for a reason, they like it and they are good at what they do. Relying on these professionals will free your time to work on what you like to do and what you are good at – building your business.
Businesses that are successful and continue to grow regardless of the economic conditions have these tools in their toolbox and are proficient in using them. So here’s the challenge: what tools are in your financial toolbox? Which do you need to add?
This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 10/9/2013.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.