Tue Sep 22, 2020 | | Business, Cash Management, CFO Services, Financial Controller Services, Financial Reporting

5 Ways To Avoid Financial Pitfalls for Business Owners

avoid financial pitfalls

No matter how brilliant an entrepreneur or business owner might be when running their business, without a good plan to maintain their company’s financial well-being, it will be difficult for their business to thrive. Regardless of industry or sector, we hear many of the same pain points that keep owners awake at night.

The most successful businesses, just like people, form habits that lead to their ultimate success. Here are the top 5 action steps successful companies implement for financial success and prevent financial pitfalls.

Create A Business Plan and Follow It

Believe it or not, when we interview businesses, most do not have an annual business plan establishing operating budgets by department or for general and administrative expenses. The best practice is that a formal business plan is confirmed (usually in the fourth quarter for the following fiscal year), which includes budgets established for operating activities and for which actual results are compared to those budgets.  

Key risk or performance indicators (KRIs or KPIs) or other warning mechanisms are implemented to highlight instances where actual performance is significantly departing from expectations.  Documented plans and goals with comparisons to actual results reflect “best practices” in the most successful organizations.

Always Know Your Cash Position

Many small and mid-size companies only have a gut feeling about how much money they have and a rough idea of when receivables will be collected and when bills will be paid. This recipe for disaster leaves companies vulnerable when the unexpected happens. The most successful businesses create weekly cash balances and prepare a formal quarterly cash flow forecast showing the amount and timing of estimated cash inflows and outflows.  

This forecast is typically updated monthly to reflect a comparison of actual and anticipated results.  They will then be able to see anticipated month-end cash balances and the relationship between operating cash and reserves. Most importantly, this allows companies to plan for changes in business conditions.

Get More Reliable Financial Reports 

One of the most important reasons to hire an accountant is to have a better financial view of your business. Without one, businesses will not have access to reliable monthly financial reports to help them manage their business. And settling for printed pieces from accounting software will not offer the same in-depth analysis as working with an accountant. The most successful companies receive a standard reporting package that is presented to them each month.  

Typically the package includes a balance sheet, profit & loss statement (income statement), year-to-date results versus the original budget, an earnings forecast, an analysis of general and administrative expenses (G&A expenses), and most importantly, an executive summary that includes key performance indicators (KPIs), key issues, and an analysis and recommendations.  This allows businesses to know whether they are following – or exceeding – the business plan they set. 

Minimize Risk with Standard Operating Procedures & Controls

The daily operations of your business move quickly, and often there isn’t a lot of time to stop and develop processes and procedures to make the day-to-day run more smoothly. Doing that could take time away from fulfilling client orders or finishing a job. However, we often hear business owners find their offices “hectic” or “out of control,” They can’t get the information they need when needed. 

Or they haven’t put the correct checks and balances in place to ensure they are safeguarding against potential risk. Do you have the same person overseeing all aspects of handling your cash, from opening the mail to transferring money and recording cash through reconciling bank accounts? In even riskier situations, we have seen organizations where the same individual can add a person to a payroll system and change salary amounts.

Standard operating procedures and internal controls are actions, policies, and procedures created to safeguard assets and ensure all transactions are recorded timely and accurately.  Such safeguards include separating functions to ensure there are checks and balances.  

Standard operating procedures and internal controls help protect the company not only from theft but from the turnover of staff as well.  There should be written procedures for how tasks should be performed if the bookkeeper or another employee leaves.  

Leave the Financial “Stuff” to the Experts

Many business owners struggle because they either do not trust the financial information their team generates from their accounting systems, or they do not receive enough – or any – financial information to review. This forces them to spend excessive time on internal operations instead of leading and building their business. 

The most successful companies benefit from partnering with a seasoned financial professional who provides perspective on strategic financial and operational initiatives. Whether a financial controller or chief financial officer (CFO), this person becomes a management team member, participates as a sounding board and source of advice on various business and financial matters, and will navigate the industry through financial pitfalls.  For small and mid-size companies, adding this strategic partner can be a game-changer for the success of your business.