Pulling It All Together: A Good Financial System
Originally published: 09.01.11 by Ruth King
Five activities will keep you on track.
Over the past several months, I’ve written about the pieces that comprise a profit and loss statement and balance sheet as well as how to ensure that these financial statements are formatted correctly. A good financial system is based on both the monthly financial data and weekly information you gather.
1. Financial statements must be accurate and timely. Timely means that you receive them no later than the 15th of the following month. For example, September’s balance sheet and profit and loss statements should be on your desk no later than Oct. 15. Any later than this, and it’s usually too late to act on any minor issues you see. They are already on their way to becoming major crises.
2. Calculate the 10 critical financial ratios for that month and put them in a spreadsheet. (See the example that accompanies this column). I wrote about how to calculate these ratios in my April and May 2007 columns. Remember that the trends are just as important as the numbers themselves. An increasing current ratio usually means increasing profitability. A decreasing current ratio means decreasing profitability. If your current ratio is decreasing two months in a row, you must determine why you are not profitable and fix the problem!
3. Calculate your monthly and trailing data — sales, gross profit, overhead, and net operating profit. These graphs will tell you the overall direction of the company. (I wrote about how to calculate these graphs in April 2011).
If you find that these ratios or the trailing data are not trending in the right direction, do something to fix the issues before you have cash-flow problems.
Here are two weekly activities that you must do in a good financial system:
1. Weekly cash-flow report. Cash is the lifeblood of your company. Profits are important, but cash is more important. The weekly cash-flow report should be put on your desk by your bookkeeper every Friday. Completing this form takes about 15 minutes. It will tell you whether you have enough cash to pay your bills and payroll the following week. If you have cash in savings, it tells you whether those savings are being depleted or added to.
2. Weekly maintenance-agreement tracking. If cash is the lifeblood of your business, then maintenance agreements are the backbone. They create stable cash flow. You should know how many residential and/or commercial agreements clients you have, the number of agreements up for renewal, and the number that were renewed that week. You want the report to show renewals of at least 80%, and maintenance-agreement customers increasing.
These five activities will help you discover whether your company is moving in a positive, profitable direction.
Articles by Ruth King
Your Acid Test - Do You Have Too Much Inventory?
Your Acid Test - Do You Have Too Much Inventory? Track This Indicator to Get a Clearer Financial Picture
Do You Have Enough Cash to Pay Your Bills on a Long-Term Basis?
Check Your Liquidity Ratios
Why I Hate KPIs
Comparing KPI ratios to industry standards alone can be a risky move.
Finishing and Implementing Your 2014 Three Page Business Plan
In the past two months you’ve created your 2014 goals with your employees and your 2014 marketing plan. This month you’ll complete your three page business plan by estimating your 2014 budget. I’ll end this series with some implementation suggestions so that you make 2014 your best year ever.
Four Steps for Developing a One-Page Marketing Activities Plan
How to create page two of your three-page 2014 Business Plan