Assessing Your Company's Financial Literacy
Do you feel that the financials are written in a foreign language and you just don’t understand them the way you need to? You’re not alone. As a business owner you need good timely information that you understand in order to make the best business decision for your specific business. You need to know how the P/L, cash flow statement, and balance sheets all work together. You love doing the technical jobs within your company and you leave the financials and bookkeeping jobs go to the last minute because you don’t like doing the books, mostly because you don’t fully understand them. What is the answer? Review the following questions and be honest with yourself when answering them. If you can relate to these questions and want answers but don’t know where to turn, give us a call we can help.
Do you fully understand your P/L, Cash Flow, and Balance Sheets? +
As a business owner you know you need to be familiar with these three financial statements. You don’t need to be an accountant or a CPA, but you do need to understand what these three financial statements are telling you about your company. Your CPA is a necessary and valued advisor to your business, but you also need to understand how the P/L, cash flow, and balance sheet are intertwined and how they affect each other. You are ultimately responsible for your business and your want to have the final say in your business operations, this is understandable. Understanding your financials to the point where you know what good advice looks like and what bad advice looks like will give you the confidence that you are using the best information available to make the best business decision possible for your company.
Do you feel comfortable with your current cash flow position? +
If you are feeling financial pains, you are most likely seeing the results in the cash flow position of your company. Cash flow is a symptom of problems elsewhere in your company. An example of this may be how you are handling invoicing your customers. Invoicing your customers, either paper or electronically, should be done on a daily basis. Unless you are offering discounts such as [2% 10 net 30] your customers will wait at least 30 days from the time they receive their invoice before they send payment. If you are processing invoices twice a month for example, your company may not receive payment until 45 to 60 days from the time the job has been completed. Not to mention you have paid for the labor and materials way before 60 days have past. Cash flow is a symptom of more serious operations issues within your company. The good news is most times the cash flow cycle of a company can be improved by establishing operating processes.
Who collects on past due Account Receivables? +
As the business owner, you may have the best results when calling on past due account receivables. You have the authority to make necessary “concessions” with past due customers in order for your company to receive some kind of payment. You can relate to fellow business owners on their level drawing on the importance of their good reputation within the market. If a payment plan is necessary from the past due business owner, you can have him “give you his word” that he will fulfill his part of the obligation. Your opinion regarding a fellow business owner who is not honoring their obligation to pay is more credible than an employee’s opinion. The past due business owner also knows you may travel in the same circles they do, effecting their reputation even more. Some customers do not pay until they are called or by your company asking for payment. You may have to call at various times of the day or even visit their location in order to get past the “gate keeper” and talk directly with the past due business owner. Good record keeping on when you called and what was agreed upon is crucial if legal action is required.
Do you know your Accounts Receivable (A/R) turnover ratio? +
This is another symptom highlighted by poor cash flow. The A/R turnover ratio measures how many times your company’s A/R have turned into cash during the year. As you can imagine, this is a very important ratio for the business owner to know. This ratio is often used by lenders to analyze the quality of a company’s working capital and its ability to operate. The A/R turnover is calculated by dividing the sales on account by the average A/R balance for the year. This ratio can be improved by setting up processes targeted to get money into your company sooner. One such process is establishing credit terms of [2% 10 net 30] for payment. This allows your customer to take a 2% discount on the invoice total if they pay within 10 days of the invoice date. You may think this will cost you 2% on your bottom line but in reality you are paying more than that on your borrowed working capital and you will benefit financially from such a discount and your cash flow will improve.
Do you use purchase orders? Who generates them? +
Most accounting software systems have purchase order templates available. By using purchase orders your company will have a record of what was ordered, by whom, and for what job. This can benefit your company in many ways, including controlling inventory and in helping to prevent internal theft. Only designated employees should be able to generate a purchase order and your vendors should be told that nothing gets delivered or purchased by an associate of your company without a pre-approved purchase order. This is an operating process that can help you stay within your operating budget saving your company time and money.
Do you do job costing after the job is complete? +
By job costing you as the business owner will know if a specific job has contributed to profits or if your company lost money on the specific job. Job costing should be preformed by someone other than the person estimating the job, preferably the business owner, but the estimator should be able to review the job cost results to improve on the estimating process. The best time to job cost is before the invoice is sent to the customer so up-charges can be included if possible. Job costing should include direct materials, direct labor, sub-contracting costs, and associated overhead. If your company has Work in Process, a job costing sheet can help you determine the dollar amount of Work in Process at any given time.
Do you process credit cards? What are your costs from credit cards? +
Accepting credit cards for payment can improve upon your A/R turnover ratios. The cost to your company can be substantial if you do not have your credit card billing set up properly according to how your company processes credit cards. This credit card cost must also be factored into your pricing as you would factor in freight costs. Your credit card statement should be reconciled just as you do your bank statement.
Do you know your break-even point? Can you calculate Break-even? +
Understanding how to calculate break-even can save your company money in the long run. Break-even is factored by dividing your fixed cost by your company’s contribution margin. Break even is not where you want to be but you have to get there first before your company can begin to generate a profit. By using the break even calculations you can know in advance how much revenue you must generate to add another service truck. You can calculate how replacing an old piece of equipment with a new one will affect your break even for the company. You may want to motivate your workforce by rewarding production past the break even point in units to drive productivity. In order to calculate break even you must identify variable costs and fixed costs and understand how each affects the break even calculation of your company. When you know this you can manage costs to improve your break even producing more profits for your company.
Do you share financial information with your management staff? +
Sharing relevant financial information with key management can help your company become more profitable. When each department of your company understands how they fit into the overall “Business Strategy” they will be more inclined to take ownership of their “Operating Strategy”. When you share relevant financial information and set specific financial budgets for their departments, using the balanced scorecard and including financial goals in their performance evaluation, you motivate the managers to produce the financials your company desires and you are continuing to develop them as leaders in your organization.
