All small businesses differ slightly in their operations, environment, and methodology — making it challenging to measure business performance from a single, universal approach. What many entrepreneurs don’t realize, however, is that they can use financial statements for much more than supporting documents on loan applications and tax returns. Regular preparation and analysis of financial statements can provide small business owners with the basic tools for determining how well their operations are currently performing, help them detect/correct problems and leverage opportunities, all leading to increased profits.
In this article, we will discuss the importance of financial statement analysis for small business owners, the different types of financial statements, and how to effectively use financial data to make well-informed decisions.
The Importance of Financial Statements for Small Business Owners
Smart small business managers and owners rely heavily on the figures and conclusions drawn from their financial statements. Without preparing and analyzing your financial statements on a regular basis, you are basing many of your decisions on guesswork or vague perceptions of how your business is doing. It is standard practice to prepare financial statements monthly.
With this information, you can begin to determine the financial health of your business (cash flow, product line profitability, gross margins, liquidity), identify current or potential problem areas and identify successes. With this information you can take measures to improve your business, from making additional investments to supporting promising products to eliminating unprofitable lines of business.
Financial statements also allow you to see where your business is in danger. Just because your small business’ sales are increasing doesn’t necessarily mean the business is financially stable and it doesn’t guarantee continued success. Some of the chief causes of small business failure, including high operating expenses, poor cash management, excessive working capital investments and inventory mismanagement, could all be identified/mitigated by reviewing and understanding your financial data early-on and using the information to make course corrections.
By reviewing comparative data across periods, for example, it is possible to identify where spending has gotten out of control. On the other hand, these reports can also help you spot buyer trends and see where you make the most money, allowing you to focus more fully upon those areas that drive increased profitability.
Four Types of Financial Statements
There are four basic types of financial statements. You’ll want to make certain that you utilize all of them in order to get the most out of your financial reporting. Below are the four types of statements:
Let’s take a look at what these financial statements can be used for and how they can help you in running your small business.
An income statement, sometimes called “a statement of income and expense” or “a profit and loss statement (P&L),” is a summary of income or loss for the period. A typical income statement would be structured as follows:
It is important to understand that the income statement shows results for a period of time (a year, a month, a quarter) and that it “starts over” every period. By comparing the income statements for the past several years or periods (if comparing month-to-month), you can see trends and anomalies. These observations can then be studied further to understand the cause and determine if there is some action that could be taken to improve the business.
A balance sheet shows all of your company’s assets and liabilities, along with its net worth. It might also be called a statement of financial position. The balance sheet is a snapshot in time. It illustrates balances at a moment in time (i.e. at month-end or year-end). Unlike the income statement, which shows results of a period of time (i.e. a year, a month, a quarter), information from the balance sheet is used to estimate the liquidity, funding and debt position of an entity, and is the basis for a number of liquidity ratios.
Your balance sheet relies on the following equations:
Balance sheets typically classify assets as current assets (those that can be converted to cash within a year) or non-current assets (long-term investments, equipment and other fixed assets, and other assets (such as intangible assets). The same current versus non-current classification is performed with respect to liabilities.
The equity section of the balance sheet shows the company’s “net worth” (assets less liabilities). This should not be confused with a company’s economic worth or value. Often assets and liabilities have different market values than those recorded on the balance sheet. Most assets and liabilities on the balance sheet are stated at cost (what you paid for them, rather than what they are “worth”).
The balance sheet is often used to determination the financial stability of a company. From this statement one can understand how leveraged a company is, what resources it has to pay its bills and its general financial health.
Statement of changes in Equity
This statement rolls forward the entity equity for the period. It takes the equity at the beginning of the period and either adds or subtracts from it, depending on the company’s net income or loss, as well as accounting for things like dividends or distributions to shareholders.
Statement of Cash Flow
The statement of cash flow shows where your cash is coming from and where it is going over the course of a period of time. Like the income statement, this statement shows activities for a period of time versus a point in time. This statement starts with your beginning cash and shows the cash used or generated from various activities. These activities are split into three categories – operating, investing and financing activities.
Operating activities represent cash generated from or used for things such as buying inventory, selling your goods or services and paying employees. Investing activities represent cash generated from or used for things such as buying or selling equipment, buildings or land. Financing activities represent cash generated or used in activities such as selling or redeeming stock or issuing or paying debt.
This statement is crucial in trying to understand where cash is coming from and where it is going. Many say “cash is king” and this statement tells how a company makes its cash and how it spends its cash. In some instances a company can make certain decisions to manipulate its balance sheet or income statement; however, one cannot fake its cash flow.
How You Can Use Financial Statements as Management Tools
You can use financial statements when making a number of different decisions. For example, you can see what investments your company has made and what kinds of returns you are receiving on those investments. If you added another $10,000 to your marketing budget, did you see an increase in sales? If you cut your operating costs by 10%, how much of an effect does that have on your bottom line? Financial statements can help answer these questions.
Financial statements are also useful for highlighting the natural rhythm of your business. Every industry has high and low points throughout the year. If you sell toys, for example, you’ll likely see a high period of sales between mid-October and January in accordance with the holiday season. If you sell clothing, you’ll note an increase in the sale of swimsuits, shorts, and other summer gear starting around May. Using your financial reports to see these natural high points can help you determine when you need to increase your stock or expand your advertising efforts or when you may need to borrow money.
Owners and managers can use financial statements to ask and answer important questions about their businesses. Is a company generating a strong investment return? All you need to do is look at your operating income and divide it by the business’ invested capital (working capital + fixed capital) to determine what return you are earning. How much capital are you tying up in working capital as a % of sales? How leveraged is your company? How is a product line doing? How long does it take you to collect receivables? These are all important questions that can be answered by having and using timely and accurate financial statements coupled with analysis.
Using these Financial Reports Together
Individually, these four financial statements can tell you some information, but it’s when they’re used together that they really give you the information you need to make the best decisions. It is important to understand each statement. Each tells you something important that you might not get from focusing only on one or two of them.
Many times small and mid-sized business owners are experts in a product, sales or manufacturing and do not have the financial skills or the time to properly focus on the company’s financial matters. In these instances, you may want to bring in an outside consultant or a fractional CFO. These part-time financial experts can help small and mid-sized businesses make smarter business decisions, without the expense of hiring someone full time. Insightful business and financial analysis will lead to a stronger more profitable business. Contact Lauber Business Partners today to learn more about these options.
Managing cash flow is the core of sound financial planning and a critical component to any company’s success. Positive cash flow, or when a company’s incoming revenues outweigh its expenses, can ultimately determine the success or failure of your business.
For every businesses, managing cash flow is essential to survival. If a business cannot make their required payments to lenders, vendors and employees, their business will fail. But the cash flow heartaches of many small business owners are often just a result of poor cash and financial management.
The good news: cash management does not have to be complicated, and we’re here to help you simplify it. In this post, we’ll provide some simple and practical tips for stabilizing cash flow and achieving financial security in your company. Read on and we’ll show you how.
While in some ways it may seem counterintuitive to stagger payments, it is important to not pay everything at once. When reviewing bills, cutting and mailing all expense checks together can destroy your cash flow. Always be prepared for surprises when calculating payment plans. Stagger your payments in case of a surprise, and collect data to create a corporate, cash flow plan. Cash flow planning strategies are crucial to ensure you do not end up with a “zero” balance.
A helpful strategy for staggering payment is to setup three tiers for issuing checks:
These simple groupings will help prioritize and manage your payments in a sustainable, cash flow-friendly manner.
Pay With Current Cash, Not Expected Cash
Financial advisors often recommend responsible credit card usage – “don’t make purchases with cards if you don’t have the money to pay them off.” The same holds true in business — do not make payments based on promised cash receipts from customers. Doing this will ultimately lead to overdrafts or bounced checks.
Don’t Use Sales or Payroll Tax Money To Float Your Operations
While it may be tempting to buffer expenses with sales or payroll tax dollars, the reality is this practice could cost you more in potential penalties, fees, interest and time than simply securing short-term financing. Evaluate financing for your company and plan to deposit, rather than spend, sales or payroll tax money.
A Payroll Service Is Worth The Investment
Payroll is one of the most significant cash flow elements for small businesses. While outsourcing payroll tasks may seem unnecessary for a small company, it can streamline a normally daunting task, minimize liability concerns, and manage the collection and payment of payroll taxes.
Find the Right Bank and Maintain a Positive Relationship with your Banker
Not every bank is the same. Different banks prefer different types of clients. Their preference might be certain business sizes, industries or geographies. When times get tough banks have the tendency to pare back their clients to fit their desired target, often with little notice. Finding the right bank up front is crucial.
As a small businessperson, it is immensely important to maintain the relationship with your banker. Ensuring lines of communication remain open is vital to your financial stability. If you anticipate fees or a bounced check, contact your banker and discuss the circumstances. A proactive and honest approach can go a long way, and by understanding the situation, experienced bankers can provide helpful insight and strategies. Banks do not like surprises and it is best to deliver bad news before they stumble across it on their own.
While cash flow will likely continue to present challenges to many entrepreneurs, companies can find relief through some simple, practical strategies and best practice such as those outlined above. A little communication and planning can go a long way in improving your cash flow.
Let Lauber Business Partners Lead The Way
Lauber Business Partners is a trusted, well-equipped advisor to small and mid-sized businesses. Contact us today to learn more about our team and discuss what we can do for you and your bottom line.
An organization’s financial management plays a critical role in its bottom-line success. For small businesses, entrepreneurs, and startups especially, revenue and expense fluctuations are typical and can add to the burden of managing finances successfully. It’s hard to find great advice on managing your finances; the world is full of articles, videos, books, advisers, and consultants, each with their own biases and opinions on what to do. In this article, we will instead focus on a couple of the basic principles of financial management and the tried-and-true strategies for navigating them effectively.
Financial management is all about moving, controlling, and evaluating cash flows across a business’s operational cycle: producing a product or service, making a sale to a customer, collecting the money and starting the process all over again.
Managing finances centers around multiple aspects: purchasing raw materials, turnover ratios of raw materials and finished goods inventories, collection of accounts receivable from customers, paying bills, suppliers, and employees and establishing appropriate credit facilities to buffer business fluctuations.
When making management decisions, business owners and managers must consider how fluctuations in these internal/external operational facets will impact their profit margins, cash flow, and overall financial performance.
Ultimately, learning proper financial management strategies is vital for a business’s success.
Bookkeeping and Accounting
John Nessel, President of the Restaurant Resource Group, says, “If you can’t count your money, you can’t manage it.” Businesses cannot operate without money; Nessel argues that those who can’t control their cash flows and profits ultimately cannot control their business. While the complexity of a bookkeeping system and the number of transactions can vary between small and large businesses, the function of this process is consistent. Businesses have to record daily transactions, produce invoices, process payroll, and maintain/balance subsidiary ledgers, general ledgers, and historical accounts. Continuously, accurate bookkeeping helps businesses keep track of their profits and losses and generates information to project future outcomes.
Accounting, on the other hand, is distinguished from bookkeeping as a higher-level, subjective system that measures, identifies, records, and communicates compiled financial information. Comprised of preparing adjusting entries and company financial statements, analyzing costs of operations, completing income tax returns, and aiding the business owner in understanding the impact of financing decisions. A strong accounting process helps build a big-picture understanding of profitability and cash flow awareness. The intertwining functions of accounting and bookkeeping processes are vital to a business’s long and short-term financial sustainability.
Accounts Payable (AP) and Accounts Receivable (AR)
“It takes money to make money.” Regardless of the size/type of your business, you are most likely paying someone for something to keep your business running. Altogether, these unpaid costs to outside vendors for goods and services, comprise its accounts payable. Accounts receivable, contrarily, are assets; the money that a business has a right to collect for selling products or services on credit to a customer.
How do the terms apply to financial management? AP/purchasing records provide an organization with information about accounts with suppliers, be it outstanding invoices, costs-of-purchases, or details on how the organization made payments/purchases. This information can be used to evaluate vendors, seek better pricing, cost out products or project future cash outflows. AR systems, on the other hand, can help a business produce payment reminder letters and recover past due accounts before they become bad debt as well as help forecast future cash inflows.
As a business matures, frequently more cash is necessary to finance its growth. We’ve discussed the role of strong financial management in tracking and managing cash flows, making future projections, and budgeting for business needs. However, the financial management system is also instrumental in helping to identify and evaluate investment opportunities that can complement or enhance the organization’s current condition. Ultimately, by carefully considering information from its financial management system along with market conditions and needs while exercising sound business judgments, a business can confidently determine if they’ll reap the benefits of investing in a new project.
Understand Risk & Educate Yourself
Another primary objective of the financial management system is to provide information to help management develop strategies to mitigate risk. There are two main types of risk: business risk and market risk. Business risk is the potential that an individual company will do poorly or fail. Business risk can be managed through diversification, the strategic process of allocating capital to reduce a business’s exposure to any one particular asset, market, customer or risk. Good financial management can help minimize business risk by identifying cost problems, customer issues, unprofitable products, liquidity issues and the like.
Unfortunately, market risk is inherent to the market as a whole. However, even though one cannot control the market, there are actions that can be taken to mitigate market risk. With proper financial management and analysis, market trends can be identified and corrective actions can be taken. This might involve reducing costs, changing market segment strategies or enhancing a company’s credit facilities.
The bottom line is that there are always risks involved in business. However, with proper financial and business management, risks can be managed.
Need help? Ask Those With Experience
For many, the most challenging step in financial management is knowing where to start. For others, it’s merely maintaining the course. Small business owners’ financial decisions will impact the entire company and the people that are part of it; so it’s important to have the proper financial management systems in place to provide information to inform management when making key strategic and operating decisions. Lauber Business Partners can help guide you through every step of the process and ensure that the financial decisions you’re making are best for both your business’s present and its future.
Fractional CFO Provide Cost-effective Access To A Key Leadership Resources
It goes without saying that business leaders and entrepreneurs have certain talents and skills necessary to manage a successful business. However, those at the reigns of a company are not always multifaceted business experts, requiring effective leaders to create senior management teams. Among those leaders who oversee a company’s most critical functions, the chief financial officer (CFO) is especially important. CFOs are proven leaders with extensive experience in the financial and strategic aspects of business. But while the CFO occupies a critical role in the leadership team, not all companies have the resources or budget to hire a full-time CFO. Fortunately, there are fractional CFOs – chief financial officers who serve on a contract basis in a part-time capacity and provide a company with strategic financial support. In this post, we’ll discuss the value of fractional CFOs and cover the key considerations when evaluating a fractional CFO for your organization.
Why Do Business Owners Neglect Hiring A CFO?
One reason companies fail to hire a CFO role is that they simply “don’t know what they don’t know.” Other reasons might be that they don’t believe they can afford a CFO. What business owners often don’t realize is that a good CFO brings great value, normally greater than their cost, to an organization.
Is there really a financial impact to not hiring a CFO?
The short answer is, “yes.” A CFO provides direction, leadership and expertise in financial matters. Organizations that lack a CFO may be mispricing their products or services, improperly managing inventories, not managing contractual risk or overlooking key revenue and cost savings opportunities. These are well known CFO responsibilities but what some do not realize is that good CFOs also act as a sounding board and source of alternative ideas for the leader of the company. They challenge decision making and explore alternative business strategies to ensure the business takes the best course forward.
Is There A Magic Number Or Key Metric That Signals The Need For A CFO?
The need for a CFO depends less on spreadsheet numbers and more on the company’s strategic plan and long-term goals. Corporations experiencing growth, facing financial challenges, considering expansion, or unsure of how to capitalize on success or where to direct momentum would be well-served by a CFO. An experienced CFO can provide big-picture perspectives and evaluate the needs and opportunities of a company within the context of the broader business environment.
Why Can’t An Accounting Firm Adviser Do The Job?
When companies examine their organizational charts, many draw comparisons between CFOs and an accounting firm advisors. While accounting firms can play an essential role, they do not serve the same purpose, nor equate CFO value. Their functions are not interchangeable because accountants are often in the business of looking back – they are focused on data from previous years while preparing audits or tax returns. A proactive approach and forward-thinking, strategic mentality are primary attributes of effective CFOs. While accounting firms play an important and necessary function, a fractional CFO is imbedded in the business, seeking to understand the day-to-day operations of the business and its strategic opportunities. They are truly a member of the company’s leadership team.
Benefits Of A Fractional CFO
While the role of a Fractional CFO varies from company to company, here are the common benefits of having a Fractional CFO:
The Bottom Line
Simply put, CFOs are good for business. Entrusting an experienced leader to manage the growth and fiscal health of a company can ensure its profitability and help weather financial storms.
O.k., I’m Sold…But How Do I Afford A CFO?
While the benefits of the CFO role are clear, budgetary realities prevent many organizations from bringing on someone full-time. The good news is that even companies that cannot afford a CFO’s salary can still enjoy the position’s benefits. Fractional CFOs offers cost-effective, scalable solution that provide companies with limited budgets access to strategic financial support. Contact Lauber Business Partners today to discuss fractional CFO options for your business and learn more about the potential benefits to your bottom line.
One vital part of a company is its corporate finance function. These employees are responsible for raising capital, allocating it, and providing a strong foundation for a corporation to grow and expand.
Without an experienced professional devising robust corporate finance strategies and determining the best way to allocate capital, these companies will have a difficult time advancing. Here is a look at the role corporate finance plays in a business and how it can maximize a business’s profits in both the short-term and the long-term.
What Is Corporate Finance?
Before understanding why corporate finance is important, it’s necessary to understand what it is. It differs from a company’s accounting in that it’s focused on capital allocation rather than on reporting a company’s historical performance. Often, particularly in smaller businesses, a corporate finance professional is a part of a company’s accounting team, but they are charged with evaluating investment opportunities and deploying capital.
Accounting focuses on recording payments and income and reporting those financial transactions to management. Accounting oversees the business’s cash flow, general ledger, collections, and reports. The accounting team looks at what makes the business profitable, manages its debt, and makes the appropriate tax payments. They are subject to Generally Accepted Accounting Principles (GAAP) and regulations to report on the overall financial health of a company.
Corporate finance, on the other hand, is less compliance oriented. Instead, it looks at how the company’s capital should be allocated and employed to maximize profits. It looks at capital structure and how capital allocation can be used to improve the company’s overall value. It’s also concerned with planning for how investors can exit the business and how they will be rewarded for their initial investment.
The Chief Financial Officer is the executive who is normally in charge of both corporate finance and accounting. The CFO, along with other company leaders, creates the financial objectives and goals of the company. Generally, the CFO has employees who focus on specific tasks, including accounting, financial analysis, and budgeting. They also devise approaches to handling financial difficulties, including a lack of investment funds or the danger of running out of operating capital.
Corporate finance focuses on the allocation of capital in conjunction with the risks associated with doing so. Capital investments are typically one-time, large purchases such as constructing a new building, purchasing a large fleet of vehicles or acquiring a new business. The finance professional has to decide if shareholders should receive dividends for their investments, if the business should seek additional investment (and in what form), and if its businesses are earning a return commensurate with its risk profile. Corporate finance professionals frequently speak in terms of return on investment, internal rate of return, net present value, and cost of capital.
The corporate finance team and the company’s CFO are responsible for raising capital to fund its business needs. This means that they need to research which investments are going to help grow the company and which aren’t. Making the wrong investments can lead to poor and even fatal results.
Much of this process involves a delicate balancing act of raising money and investing it while still being in the black overall. Companies often take on extra debt during times of expansion, and the CFO has to make certain the business will be able to pay back this debt in the coming years. They also look at ways of raising money, including selling shares and borrowing money.
Once capital is raised, the corporate finance team is charged with determining, along with management, where it’s invested. This includes determining how to invest in fixed and working capital. Fixed capital funds are used to purchase equipment, real estate, and tools. Working capital, on the other hand, is the money a company needs to have on hand to operate. This includes the money needed to pay employees, purchase inventory, and operate its day-to-day operations.
A Key Part of a Business
A business’s corporate finance team is one of the vital parts of any business. It provides key information used to make financial choices, grow the business, and keep the company stable. At times, however, an external point of view and expertise is needed. That’s where Lauber Business Partners come in. If you are trying to grow your business or are in distress Lauber Business Partners is here to help you evaluate your financial choices, many of which are driven by understanding your return relative to your investment. Please reach out to us at (414) 273 – 8060 or via e-mail at firstname.lastname@example.org.
Business financial planning is essential to an organization’s success. Unfortunately, many businesses make financial planning mistakes, which in turn can have a detrimental impact on the business itself. The risks associated with business finance mistakes are considerable and present a potentially grave threat to any business.
Indeed, poor financial planning is one of the most common causes of business failures and bankruptcies. However, by understanding common financial mistakes, you can mitigate risks, and thus make better business decisions that will lead to long-term success.
Failing to Have a Cash Flow Plan
Many businesses fail, not because they are failing to generate revenues, but instead because they are not properly managing their cash flows. This is an especially worrisome problem among startups and new entrepreneurs. Often, those newer to the game have a tendency to “trust their gut” rather than analyzing, predicting, and budgeting their cash flows. This can lead to major problems.
Proper cash flow management, however, can reduce or even eliminate the risks. Business leaders need to know how much money is moving in and out of the business and its various operations. They also need to understand what their cash reserves are. By understanding expected cash flow needs management can be proactive about putting financiang (i.e. lines of credit or term loans to finance capital expenditures) in place where it will be needed.
Lacking the Needed Working Capital
Working capital is vital for any business. With working capital, you can make sure that you can buy supplies and raw materials, pay employees, and otherwise keep your business running. However, many businesses handle their cash flow management poorly and as a result, find themselves lacking working capital.
Without such capital, they can’t pay for day-to-day costs. Upon analysis, one will find that working capital needs are quite predictable. There is typically a correlation between the sales cycle and working capital needs. By studying the historical relationship between sales and working capital one can normally predict future working capital needs quite accurately
Not Establishing and Planning Metrics
Companies must constantly keep an eye on revenue, sales, ROI, and various key performance indicators. One such example is advertising, but every business process must be closely monitored.
Cash flow management refers to a lot more than just managing revenues and profits. You also have to establish budgets. Advertising is an example of an expense that needs to be analyzed and planned. Spend too little, and you won’t raise brand awareness and will miss out on potential sales. On the other hand, if you spend too much without emphasizing ROI, you’ll waste precious resources.
With advertising campaigns and other business processes through which money is constantly flowing, it’s especially important to focus on key metrics such as:
Following these closely will help you understand your business goals. While profits are the most obvious objective, they are not the only objective. Perhaps you want to promote a certain product so that you can tie it into the launch of another product in the future. Or maybe you want to build your Facebook page to 100,000 followers. It is crucial to establish your objective and measure your progress against it.
Working Without Tools to Increase Efficiency
In recent years, a wide variety of powerful software tools have hit the market that can reduce the amount of time you spend on menial tasks. That might mean simply using your computer to write up notes and directions rather than pen and paper. Or you might use advanced Artificial Intelligence-driven email tools to automate your email marketing. There are numerous opportunities to enhance your efficiency.
Try to expand your horizon and take time to understand the various tools you can use to increase efficiency. Some business owners and managers may fear change because change takes time and commitment. However, the long-term payoff of shaking things up will greatly outweigh the short-term pains.
Only Planning for the Present
Financial planning is just that. It’s planning. And that means taking the future into account. Work for today, sure, but make sure that you are planning for the future. Financial planning has to consider the days, weeks, months, and even years ahead. True, circumstances will change, and so your planning might change as well. However, it’s better to be proactively updating your plans rather than reactively responding to changes.
Consider contingencies as well. With cash flow management, you need to consider factors that could impact the flow of cash.
You need to think ahead and make contingency plans. While planning for what might seem to be remotely likely events is a waste of time, when the unexpected happens and you have a plan in place it can sometimes make the difference between success and failure.
Financial Planning and Cash Flow Management Are a Must
Sound financial planning and expert cash flow management are crucial for ensuring your business’s health. As a business owner or manager, you are the brain of the operation. Add in your staff, and you have a body as well. However, money is the lifeblood that keeps everything working. This means sound financial planning and cash flow management are essentially the heart of your business, making sure the “lifeblood” is flowing to where it’s needed.
Accounting is a critical function of virtually every organization – from businesses to non-profits, governments, and civic organizations – all rely on the accounting process to measure financial health and performance and make informed decisions.
Within the broader practice of accounting, there are specific areas of focus. In this post, we will examine the primary branches of accounting, the applications of each, and the value they provide to various businesses and entities.
What is accounting?
While accounting is a term familiar to most people, many are still unclear what exactly the process entails. Before delving into the different categories or branches of accounting, it is important to first establish a basic definition of the practice.
The Business Dictionary defines accounting as “a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information.” Accounting helps organizations determine their profits, losses and cash flow during a defined timeframe, as well as determining the value of the organization’s assets, liabilities and equity at a point in time.
Specific accounting functions include:
Perhaps the most standard form of accounting, financial accounting, presents a business or other entity’s assets, liabilities, equity, revenue and expenses via balance sheets and income and cash flow statements. Organizations typically employ a bookkeeper or staff of accountants to perform this function who utilize generally accepted accounting principles (GAAPs) as a guide in preparing and representing financial information.
Managerial accounting is essentially the expansion and interpretation of information for the purpose of informing and directing management operations. Managerial accounting focuses on things such as margin analysis, productivity measurement, product costing, variance analysis, trend analysis, forecasting and capital budgeting, among others. This information is often used in an organization’s goal-setting process, performance monitoring and trouble shooting. It is common to establish key performance indicators (KPIs) from various managerial accounting measures. This work is typically performed by staff accountants, management accountants and financial analysts.
To determine taxable income and tax liability, organizations rely on tax accounting. Accurate and effective tax accounting will help ensure that companies and other organizations comply with IRS regulations and avoid fines and penalties. This method also includes tax planning, through which organizations seek to reduce the amount of taxes they pay by being strategic in how transactions are structured. This work is typically performed by accountants with specialized training in taxation and, in some instances tax lawyers.
The bottom line: value
Accounting is an invaluable function within every organization, allowing for improved communication, more sound decision making, proactive planning and projections around profit and losses. The foundation of accounting is information – accurate and actionable financial information. With this information, organizations can effectively plan for and navigate both financial challenges and opportunities.
Business know-how in accounting and beyond
Lauber Business Partners is the go-to firm that small and mid-sized organizations turn to for help in solving their business challenges and achieving their goals. Our seasoned team of leaders and fractional CFOs offers deep expertise in financial management, human resources and talent acquisition.
Contact us today to learn more about how Lauber Business Partners can deliver value to your business.
Cash flow forecasting. Those three words strike fear into the hearts of many business owners. Why? As we discussed in a previous post, many small business owners simply do not manage their cash inflows and outflows well over time. Couple this challenge with the fact that many businesses inefficiently forecast when faced with expenditures, loans, or a fluctuating market, and you have a recipe for trouble.
Fortunately, cash flow forecasting is formulaic and does not have to be painful. In this post, we’ll examine some best practices to help ensure your cash flow remains positive.
Determine Peak Needs
For cash flow forecasting, your financial adviser should be on speed dial. A financial adviser can identify the hills and valleys of production, predict potential surpluses or shortages, and therefore plan accordingly to keep your business running smoothly.
You should also seek out a trusted advisor to help you understand your net working capital as a percent of sales. With this knowledge, you can quickly estimate capital requirements related to new contracts, expanding customers, and changing business levels.
Leave No Stone Unturned
Account for everything. Efficient, accurate cash flow forecasting requires access to, and consideration of, all overhead – both recurring and non-recurring. Be sure to account for labor, raw material and energy, as well as non-recurring expenses such as legal fees and tax preparation costs. Additionally be sure to account for non income statement expenses such as loan payments, capital equipment replacements, prepaid expenses and deposits.
It is imperative to anticipate every future cash outflow and incoming payment, as well as the timing of payables and account receivables.
Identify Barriers And Plan Your Solutions
A significant barrier to cash flow management is ineffective invoicing, which in turn, can delay payments. Be it incorrect information, delaying invoices, or permitting late payments, poor invoicing practices lead to inconsistent delayed cash flow and ultimately harm a company’s operation. Aside from offering payment reminders or incentives, timely invoicing is an easy technique to practice to help rebuild cash flow. Many companies also provide a variety of payment services to streamline the billing process. From apps to online/e-commerce solutions and pay-by-phone systems, digital payment processes can help improve cash flow.
Inadequate resource management is a challenge shared by companies today. If not managed properly, expenses and overhead can have an adverse effect on cash flow. Examples of poor resource management include unnecessarily repetitive processes, redundant systems and machinery, rework, unwise investments, and excess office space.
Business disputes can also be detrimental, and leave businesses hamstrung and scrambling if proactive measures have not been taken to manage risk. By following best practices, ensuring your policies, business forms, contracts, and governing documents are appropriate for your business environment, and consulting regularly with legal counsel, you may be able to avoid costly business disputes and maintain a solid defense.
The Bottom Line
Cash flow forecasting should be a primary component of any business plan. Because it requires a thorough, proactive, and thoughtful approach, using the tips outlined above will lead to improved cash flow management.
Contact Lauber Business Partners today if you’re interested in learning more about effective cash flow forecasting or need help implementing such strategies into your organization. We have the expertise to transform your operation and help you establish sustainable cash management systems.
Business owners are often unsure what to expect from their financial person. All financial people are not created equal. There can be significant differences due to experience and aptitude. In companies with revenues between $5 and $50 million financial people generally perform at two different levels.
Differences Between a CFO and Controller
Bring the Numbers to Life:
Provide The Metrics for Success
Manage the Cash
Project and Protect
Supply the Financial Perspective
The old business adage that “cash is king” seems more important in this challenging economy. While it’s always important to be in a good cash position, it’s more critical to understand the lifeblood of your business in these uncertain times. A 13-week cash forecast will help give you that understanding and put you in a more powerful position to make business decisions. The forecast should be updated on a weekly basis, so you always have an informed outlook of the coming months.
While a 13-week cash forecast is common and represents a reasonable time horizon, you can create a cash forecast for a different time period. The number of weeks you include is not as important as having a report that gives you a reasonably accurate picture of the road ahead.
Learn more about cash forecasts by reading, ‘The Cashflow Conundrum: Tips for Keeping Your Company in the Clear.’
1. Identify Expected Cash Inflows
Allocate each of those cash inflows to the week when you expect the cash to be received.
Inflows normally include:
2. Identify Expected Cash Outflows
Cash outflows commonly include:
Items on the expense side are usually easy to identify, and can be pulled from your monthly accounting records. Receivables are often less clear, and thus become the item in the cash forecast that is most challenging for a business to accurately project.
3. Project When Your Receivables Will Be Paid
A good approach to get a handle on these numbers is to create three categories.
4. Add Projection of Cash Receipts from Future Sales
Once you have projected when your receivable will be paid, you need to add in your projection of cash receipts from future sales. In some businesses, seasonal activity must be considered in the 13-week cash forecast. For example, a construction company may have a rising payroll in the spring and the related collection of receivables several weeks later in mid-summer.
Why is it Important to Have a 13-Week Cash Forecast?
The more challenging your cash position is, the more valuable this tool becomes. The insights from a 13-week cash forecast will not only help you better manage your business but also help you communicate with your banker or other outside entity.
For example, let’s say you have a significant receipt due in Week 11 but your business will be in a difficult cash position prior to that. This tool gives you the ability to see what you might be able to shift on the schedule to deal with the shortfalls. It also gives you the ability to proactively communicate your situation so that your creditors know what to expect. You will find this goes a long way in gaining cooperation. It’s worth taking the time to establish the process.
Once the cash forecast is set up, it’s just a matter of plugging in the current numbers. The report becomes even more powerful when you compare its estimates with actual inflows and outflows. With that actual data, you can adjust the report to increase accuracy.
Interested in more information about Finance & Accounting? Read our past blog posts:
Partnering with a Fractional CFO to Improve Operational Efficiency
Engage a seasoned Chief Financial Officer with extensive skills, experience and strategic insight without paying for a full-time resource. Our fractional CFOs provide customized solutions and valuable human capital to keep your company running without increasing your ongoing overhead. From creating cash forecasts to providing credibility with banks and 3rd parties, a fractional CFO free’s up your time so you can focus on what you do best—growing the sales pipeline.
If you have any questions regarding our Fractional CFO services, please do not hesitate to contact us.