Sheri A. Pawlik, B2B CFO®

How Much Control Do You Have … Financially?

I am very excited because I have finally figured out a way to describe the financial progression I see every day.  Please see the article below and ask yourself – where are you on the financial continuum?  If you are not where you want to be – why?

 How much control do you have over your company financially?  I am not necessarily thinking of the strength of your balance sheet, but rather your financial processes.  The more robust the financial and operational processes you have in place, the more control you will have over your future.

 As I watch companies mature I see a natural progression.  I believe it is related to the changes that occur as companies move from start-up to becoming a 2^nd stage company.  Here is the progression I have seen.

 Phase 1 – Inaccurate Financials:

Some companies are stuck at the beginning, with little to no control over their future, and possibly their present.  Financials are inaccurate and produced for the owner well after the end of the month.  Financial controls are often lacking.  As companies start-up they often have someone doing the accounting that has little to no experience in bookkeeping or accounting.  The good news is the person was “free”.  The bad news is the person can cost the owner a lot of time and money.  This leaves the owners unsure, not only about their profits, but also about cash.  The owners are often stuck managing cash rather than finding sales.  In addition, if the company needs financing, the bank and investors will not lend to it until the financials are reliable.

 Phase 2 – Accurate Financial Statements:

Accurate financial statements are a must to grow past start-up.  This is the first step in increasing the owner’s control.  Bank reconciliations are done monthly, which means the cash balance in the financial system is correct.  At a minimum the owner knows the sales for a given time period and the related profit/loss.  He/she can now pay taxes with some assurance that the tax bill was accurate and can track costs by line item year over year.  This can be achieved with the help of a knowledgeable bookkeeper, CFO or CPA. 

 Phase 3 – Key Financial Indicators of Actual Financials:

As companies continue to progress the owners realize they need more.  While accurate financials are good, that is just the first step for owners to know where they are financially.  The financials alone are too detailed for owners to make decisions.  To really understand financial results the owner should be reviewing metrics from both the income statement and balance sheet.  These metrics provide high level results so that the owner can know at a glance how the company has performed.  Listed below are some metrics that should be considered.  It is not a complete list, but a good start.

1. Net Income
2. Operating Cash Flow
3. Gross Margin % and Dollars
4. Sales
5. Fixed Expenses
6. Breakeven
7. Debt to Equity Ratio
8. Current Ratio

Phase 4 – Projections of Profits, Cash and Key Financial Metrics:

The metrics above are critical to understanding where a company has been.  However, to gain more control over cash and profits both today and in the future it is necessary to do cash and profit projections.  This can help an owner plan for the future.  He/she can see where the cash peaks and valleys will be and adjust accordingly.  Banks and investors often want this kind of information as well.  Budgets and forecasts help owners move all of the employees in a common, consistent direction.  In start-up, owners often say “just do as much as you can” to the team.  This goes for sales, operations, etc.  However, this energy can only last for so long.  The benefit of having more than one person in a company is the magnitude of what can be achieved.  The company can achieve much more with several people than it can with one, as long as the entire team is moving in the same direction. 

Phase 5 – Strategic Planning – Key Performance Indicators Including Financial Metrics and Operational Drivers

While financial metrics are great, they are the result of what has happened.  If an owner wants to take his/her company to a new level it requires a clear vision as well as clearly defined operational drivers.  These will be different for all areas.  For sales it may be sales calls, for operations it may be quality issues, etc.  This will take time and commitment of the operational staff to clearly define the drivers.  These metrics will become the leading indicators that are tracked to verify if the company is on the right track to achieve the desired financial results. 

 I am confident you will feel more in control over your cash and financial future as you progress through the phases listed above.

 If you or someone you know needs help in walking through the financial progression have them contact B2B CFO®.  I for one have helped companies at every point along the continuum.  We offer a free review of company financials along with benchmarking data.