Why would you ever want to be bothered with your business’ financial stuff? This is something your accountant, or your finance department should take care of, and it should just happen, right? In the end, you are a business person, not a finance professional. Why should you spend your limited energy on managing your finances?
One of the best explanations I have come across on why you should make finances one of your highest priorities, comes from Michael E. Gerber, the founder of E-Myth, and it goes like this:
”I have heard so many new-age would-be business mavens repeat that saddest of noxious platitudes, ‘Do the right things and the money will take care of itself.’ Let me tell you this, the money ‘never’ takes care of itself. Never!”
– Michael E. Gerber
If you don’t give it the right attention and do not meticulously plan your business’ finances as you would do with any other area of your business, but simply abdicate the control over it to your accountant or finance department, it can literally drive you out of business quicker than you can say “cash”.
Truth be told, we all have kind of a love-hate relationship with money, pretty much along the lines of they-are-the-root-of-all-evil, but can’t-live-without-them. Almost all of us (me included) want more of the stuff, but handling it stirs such powerful emotions within us, that most of the times we simply abdicate their management to the technicians we hire to help us manage it (i.e. finance professionals).
The fundamental problem with this approach is that the technicians who take care of our money are great at sorting out the technicalities behind our business’ finances, but are not the ones who set the strategy of the company. We are. And if we are not able to deeply understand the numbers behind our business, and are not able to translate our vision into numbers, we will not be able to take our business to the heights we know it can reach. And what’s worse, we expose our business to tremendous amounts of risk. Studies show that the number one reason for which companies go out of business is poor financial management and very low or no cash flow visibility.
Every business has a financial management system. No business could exist without one, because no business could otherwise calculate and pay their taxes. However, simply having an accountant enter all your bills and invoices in your accounting system and producing your tax returns and financial statements is hardly enough for a proper financial management process. A simple depiction of a financial management system can look like this:
The problem with many companies lies in the activities marked with red in the diagram above. These are either completely ignored by owners and managers, or they are not performed properly so that effective decisions are taken.
As a business owner, General Manager or Finance Manager / CFO, you need to make sure your business captures the accounting data from your business activities correctly and in enough detail, and to effectively transform this data into valuable information for decision making.
Your financial management system should not just gather business data, but use it to produce timely, accurate and relevant information that speaks in business language and helps you understand business performance and gives you visibility into your business’ future.
Business Control Reports are nothing more than data gathered by your accounting system, which is transformed into information and displayed in the form of business reports. These can take multiple forms, but the most common ones are P&Ls (Profit and Loss reports), Balance Sheets and Cash Flow statements. These can paint a very vivid picture of your business’ past performance and can help you understand the effects of your actions and decisions from the past. Effective Business Control Reports have to contain just the right amount of detailed information to help you understand performance in all business areas, but at the same time keep the big picture over your whole business.
Budgets are literally the manifestation of your vision into this world. Not having a budget is like walking blindfolded through a thick forest. You will definitely hit a lot of trees!
You should have at least a budget for the next 12 months and update it as often as needed when things change significantly. A budget comprises the same elements as a Business Reporting Package (P&L, Balance Sheet, Cash Flow), but are a projection of future business activities extending at least 12 months into the future. It shows what sales you could be making, what expenses you could incur and what profits you could be making. It also shows the expected financial health of your company through the balance sheet and the cash flow statement.
Budgets are also a powerful tool to empower your employees in making sound business decisions in their area of responsibility. Once you set a budget for each department and each cost center, managers can be given the freedom to make decisions within the limits of their assigned budgets, freeing you and empowering them to bring value for the company.
Every company, small or huge, should have a cash flow forecast for at least six months into the future. A cash flow forecast is a monthly, or even better weekly plan showing the amounts of cash which are predicted to enter and to leave the company in the near future. This allows you to have great visibility into the future of your business and make sure you have enough money to cover expenses.
Cash is the lifeblood of your business and without a cash flow projection, you cannot make sure your business will have enough to be able to thrive.
The bottom line is that your business needs a well-designed and well-executed financial management system in order to thrive. You, as a business owner or manager, also need such a system to be able to steer the business towards your vision and to make sure it survives the journey. The good news is that in today’s digital age, there are powerful systems available that can help you automate these tasks and transform data into powerful insights right at your fingertips.
Why Analyze Financial Reports?