We are all feeling the pressure of the worst recession since the Great Depression.  We see it in the news every day, we see long-established companies go out of business as we feel the effect of the Dow Jones and our shrinking investment portfolios.  Many companies are in survival mode.  So, what can business professionals do?  I believe it is time to get back to basics.  This is the time for companies to look inside and ensure that the fundamentals of running their business are strong.  At a minimum, management should look at the following four areas.

Internal Control Procedures

This is the time that companies should revisit the quality of their internal control procedures and ensure that they are appropriate for the current working environment.  Strong controls ensure that company assets are protected from theft and fraud (a significant risk in today’s economy!), and contribute to timely, accurate financial reporting.  As companies downsize to reduce their costs, there is increasing risk to organizations from poorly designed controls and from non-compliance with existing control procedures.  It is important that management address areas where such control procedures should be modified.  For example, there are certain operating activities that should not normally be performed by the same individual in order to avoid conflicts of interest (one example would be where a person writes checks, signs checks, and reconciles bank accounts).  In small and mid-size companies, downsizing has caused incompatible functions to be performed by the same individual or department.

In addition, management should review the control environment to ensure that not only are controls in place, but that the controls would be effective even if they were performed as designed.  An example of a control that should be performed is that a supervisor initials an invoice before it goes out to the customer.  An ineffective application of that same control is that the invoice bears the initials of the reviewer, but is mathematically incorrect.  The control would only be considered effective if the initials were on the invoice and the invoice was correctly prepared and recorded in the books and records in all respects.

Management should perform a critical self review of its control procedures and make appropriate changes to ensure that the company is not susceptible to fraud or theft.  Management should consider bringing in outside professionals to perform audit procedures on the internal control system to identify critical weaknesses and recommend improvements.

Cash Management
Management should ensure that daily cash balances are reported.  The balances reported should be the cash held by the bank as well as the cash balance reported in the company’s general ledger.  Many entrepreneurs focus on the bank balances and ignore the book balances.  They need to understand that the bank balance is where the company is at that point in time, however, the general ledger balance is where the bank balance is headed, once all the outstanding checks and deposits clear.  The book balance is the key.

Forecasting
Management must ensure that it has cash flow forecasts for at least the next quarter, but ideally on a rolling 12-month basis.  Many universities teach the 3 fundamental principles of Finance – they are, 1) Get the Cash, 2) Get the Cash, and 3) Get the Cash.  How do we do this?  By ensuring that controls are strong and management is anticipating all future cash receipts and disbursements, based on reasonable assumptions for the business, and make the timely and appropriate adjustments to business practices to ensure that cash balances are adequate to meet the company’s current and anticipated cash needs.

It is also important to perform rolling 12-month earnings forecasts.  Such projections will enable management to plan and manage through the normal ups and downs of monthly activity, plan for those months where additional sales efforts are needed, anticipate hiring needs or contractions to meet business demands, control costs, and facilitate tax planning.

Management should review these forecasts monthly and take the appropriate actions to ensure that the business is functioning according to its business plans, and that necessary changes are made to its plans and related business activities on a timely basis.

Training and Development
It is always important to ensure that the company has the right people in the right positions.  Now more than ever, management should examine the core competencies of each job function and determine the skill sets of each of their employees to ensure that there are no gaps in skills covering those functions.  To the extent gaps are identified, training should be provided where the skills can be developed or recruiting should occur to fill those skill deficiencies.  Each department head or manager should periodically (but at least annually) re-evaluate the core competencies and related skill sets of its employees.
There are many other activities that management should undertake in its day-to-day oversight and stewardship of the company.  Focusing on these four areas should go a long way toward not only strengthening your company’s current financial position, but also positioning your company to get through these very challenging times.  The world around us is chaotic and complex to be sure, however, this is the time to be more introspective and strengthen the things that we can control.  By so doing, we raise the prospects for getting through this difficult economic period and coming out the other side stronger and better positioned to create wealth and prosperity.

The partners at CFO Strategies LLC are experts in all of the above areas.  Please contact us for a review of your controls, cash management and forecasting practices.

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