5 Tips to Avoid the Most Common Financial Pitfalls for Business Owners
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 go and interview businesses most do not have an annual business plan that establishes operating budgets by department or for general and administrative expenses. The best practice is that a formal business plan is established (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 advance 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 feel for how much money they have and a rough idea of when receivables will be collected and when bills will be paid. This is a recipe for disaster and 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 results versus 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 reports 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 hear far too often that business owners find their offices to be “hectic” or “out of control” and they can’t get the information they need when they need it.
Or they haven’t put the right checks and balances in place to make sure 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 cash and recording cash through reconciling bank accounts? In even riskier situations, we have seen organizations where the same individual is able to add a person to a payroll system and change salary amounts.
Standard operating procedures and internal controls are actions, policies, and procedures that are 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 in the event 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 their 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 member of the management team and participates as a sounding board and source of advice on various business and financial matters and will navigate the business through financial pitfalls. For small and mid-size businesses, the addition of this strategic partner can be a game-changer for the success of your business.