Business finances are either very interesting for you or they make you want to plug in your ears and go, “La, la, la!” or think and say you’re good, because you have a bookkeeper and accountant.
Turns out that one of the biggest financial mistakes small businesses make is that complacency that your bookkeeper and accountant are enough for your financial management.
Now CFO has been providing multi-level accounting, bookkeeping and CFO services for 15 years, and in this blog post, Bill Sablan of Now CFO shares the common mistakes they often see in the small businesses with whom they work.
Business owners often don’t look in depth at these financial aspects–or they neglect them altogether.
Mistake #1: Relying on financial accounting and neglecting management accounting
Many business owners believe that having a day-to-day bookkeeper and a Certified Public Accountant (CPA) doing their taxes is already good enough.
Financial accounting – These are the tasks for which your bookkeeper and CPA would be in charge. It looks backwards: tax returns, bank records, financial statements.
Management accounting – This is on you and/or your manager or Chief Financial Officer (CIO). It uses that historical financial data to look forward and create informed budgets, forecasts and analyses, helping you run the business.
Management accounting shows you there’s a lot more you can and should do outside of the functions performed by your bookkeeper and CPA. Management accounting is using accounting to run your business: creating budgets, forecasts and analyzing your data for what steps you can take to move your business forward and upward.
Now you’re making business decisions based on concrete information. Your CFO can help you understand and therefore make your financial accounting useful to your business, instead of just papers you push around and get done for the bank and the IRS.
Mistake #2: Not establishing budgets and variances
Determine how much you CAN spend, not how much you plan to spend.
You might say, “But I do make a budget.” Are you doing it right?
A lot of companies establish budgets in December, and then they only look at that budget again at the end of the year to see how they did. That’s a mistake. Start tracking your variances at least on a monthly basis.
Establish your budget by thinking forward, not backward.
So many business owners estimate their revenue and total income for the year, then look at their expenses from last year and just copy it forward for the current year. Then they consider what remains as their profit.
It’s a backwards way of running a business. You’re in business to make money. You need to make a certain amount of money for it to make sense for you to continue doing your business.
So, look at profit first. How much money do you need to make for this to be a viable business going forward? How much money do you want to make?
For example, you want to make $100,000 profit for the year.
That’s the cap for your new budget.
Next, estimate your revenue. We’ll discuss that in the next blogs.
Once you’ve done that, you can now see how much your expense budget should be.
It tells you how much money you have to spend for the year. And then, you start allocating that bucket of expenses into different departments. That way, you’re actually moving your business forward to where you want it to be, not where to where you think it’ll end up.
Mistake #3: Taking too long to close out the books each month
Financial visibility means financial data must be:
For all four to apply, you need to close your books by the 7th of the following month.
Closing the books means finalizing every month’s books so that you can see how your business has performed for that month. For example, you want to look at your January results–how far into February before you have that information?
When you make the mistake of taking too long to close the books, you don’t have the accurate data required to make accurate decisions in your business. Many companies are usually months behind on this. They close the books by the 15th or 20th of the following month
Now you end up evaluating your information around that date. You’ve realized you spent too much money on this or that. You want to get rid of that immediately. But because you took too long to close the books, you’ve lost an entire month in which to rectify that situation.
So get your books closed by the seventh, or ideally even the second day of the following month. The sooner you can look at your financial information, the more relevant it will be and the more steps you can take to fix mistakes and capitalize on opportunities.
Mistake #4: Cash flow forecast based only on whether or not you can cover the next payroll cycle
Your management accounting should go beyond making the payroll.
You should always know your cash position– how much cash you have in the bank– 13 weeks from now. That’s one quarter of the year. That’s the standard. Why? There are more solutions available for cash shortfall in three months than being short on cash next week.
Always know your cash position 13 weeks ahead, every week.
- Are you set to cash a check? $50,000 in the bank won’t be $50,000 if you cash a $30,000 check.
- Do you have automatic debit arrangements for bills? That could mean a total of $9000 deducted from what’s in your account.
If you know your cash position every week 13 weeks forward, you can start to properly manage your business’ finances. This tells you how much you can spend, if and when you can hire when you can move to a new office, and so on.
This affects your day to day business. When you don’t know your cash position, you’ll be overdrawing from your account all the time. Does that sound familiar?
Mistake #5: Not having a report card or dashboard
This is the least critical of these five mistakes. The critical pieces of information you need to monitor are your cash flow and budget.
Mike Sablan recommends this dashboard as your business starts to grow. Remember, financial data helps you to make smart business decisions. So you need to be able to view key financial data on a weekly basis.
You should have a one-page report that shows you the most important financial indicators for your business.
- Budget variances
- Key activities
- Sales figures
- Upcoming expenses
A one-page report— that’s the keyword. You don’t want 13 to 15 pages. That’s too much and you might gloss over and miss key information. The one-page report shows you the most important financial indicators for your business.
For example, you can see Collections in the list above. Maybe you’re doing a lot of business and you’re generating a lot of revenue. However, if you’re not actually collecting money, it doesn’t count. It’s not revenue yet. Bill your clients. Follow through and collect. People must pay you for your work.
So this dashboard report shows you where your weaknesses lie, and what you need to focus on in the coming week.
Get your dashboard established, and then actually take an hour or two to look at it every week.
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