By now you’ve read our blogs exposing the accounting and finance problems many small businesses experience.  You’ve seen a glimpse of the possibilities when those problems are faced.

But how do you move from the problems to the possibilities? How do you cross that chasm from where you stand today with the problems and move to living in the world of the possibilities? Those possibilities as detailed in our last blog.

First and foremost, you are going to have to find a way to establish a reliable bookkeeping and accounting system. 

You may need outside expertise for this, as the foundation of the accounting system must be built with an in-depth understanding of accounting and financial reporting. The system must be structured to track the key financial data that is crucial to running your specific business. 

Systems must be in place to accurately track profitability, cash flow, and establish a basis for predicting financial outcomes.

Here are just a few things your accounting system will need to produce.

  • Weekly analysis of cash position and cash needs. This weekly report should detail the business’s current available cash and the required cash disbursements in the coming 7 to 10 days.

Weekly high-level understanding of your cash position and cash needs not only helps you sleep better at night, it allows you to make smart spending decisions.

  • Summary of very near-term larger cash flow movements – i.e. the loan payment is due next Tuesday, our largest customer will be paying us this Friday, bi-weekly payroll is next Monday, monthly payroll taxes are due in 10 days, etc.

In depth understanding of cash positions and needs for peace of mind and better decision making.

  •  Up-to-date and accurate customer ‘receivables aging’ and vendor ‘payables aging’.

You should always be on top of which customers owe- how much and when they owe it.

This allows you to make smart decisions on continuing to do business and extending credit to customers. And understanding your position with key vendors helps you keep those crucial relationships in tack.

  • Breakeven point is the sales level at which the business has covered all its costs and expenses.

This allows you to make decisions during the month on where to concentrate your efforts.

At Financial Optics, we typically determine the monthly sales breakeven point for our clients. Many of our clients break that down to daily sales breakeven points so they understand how the business is doing on a day-to-day basis.

  •   Sales reports updated daily.

Staying up to date on how you’re doing this week and month-to-date against breakeven points. 

If break even points don’t seem to be a concern for your business if you have established a profitability track record, then you may want to compare to sales goals or forecasts.

  • Gross profit margins. Monthly totals and per transaction.

Smart business owners understand their minimum gross profit margins needed on every single sale in order to meet profitability and cash flow goals. 

This allows them to make smart decisions on pricing, as well as on buying & hiring decisions (that also impact gross profit.) 

Gross profit analysis is done through understanding financial statements, break-even analysis, and financial forecasts.

  •  Monthly financial statements: which include an income statement, balance sheet, statement of cash flows.

You’ll gain insight every month regarding gross profit, net profitability, cash flow, and liquidity. 

In my opinion the focus here should be more on the overall financial health of the business, and not just top line revenue.  You can read more about that in our guide here. 

I do realize that understanding financial statements (especially the balance sheet and statement of cash flows) may take some coaching and experience. We help our clients read and understand financials all the time.

  •  Financial forecasting of the income statement and cash flow.

Using financial forecasting to manage and drive profitability and cash flow is on the highest level of financial acumen. 

Financial forecasting is the best tool available to manage and improve profits and cash flow. Also, forecasting financial outcomes on your key strategic plans is also a very powerful tool to refine your planning and make key high-level decisions.   

These are just the basics of what your accounting systems and finance department need to produce for you. They should also be competent enough to coach you on how to use the financial data to build a healthier business. And, depending on your industry, there are other KPIs (key performance indicators) you can analyze to drive your business forward.

Oh, one last thing. 

The most important thing to crossing the chasm to sound financial management of your business, is your attitude. 

If accounting and finance is one of your weaknesses, it will take hard work and a strong desire to overcome that weakness. One of the fastest and most effective ways to overcome the weakness is to find an outsource accounting firm that is capable of turning your accounting and finance into a strength for your business.   Ready to get started?  Financial Optics is here for you.