New entrepreneurs are amazing. They focus on their product-market fit and attracting talent, guiding their new enterprises towards success.
However, their new enterprises can be put at risk if financial management practices and entrepreneurial approach are left unattended.
Take Chris for example. His financial management skills were lacking but he thought that once he got successful he could hire a bookkeeper or accountant. He focused only on sales and collecting funds; his enterprise was managed by his bank account balances and expected funds. As long as he could cover payroll for his few employees, he was happy.
However, at the end of the year when he met with his accountant, he realized he had not saved money for taxes and had lots of liabilities that had accumulated on his balance sheet that he had not even really paid any attention to.
So what is the right amount of attention that a busy entrepreneur should give to financial management?
Let’s take a look at the financial management cycle that is common for most businesses.
1. Budget and forecasting typically happen at the start of the business year and should be re-evaluated each quarter.
This is a good time to convert growth plans into quantifiable outcomes and expectations. Knowing your unit cost margins is helpful so you can forecast seasonality or increased production levels. Entrepreneurs tend to over-project gross sales and underestimate the cost of sales and other expenses related to general selling and administrative activities. Be realistic.
2. Bookkeeping and bank reconciliation happen weekly and at the end of each month. A startup may not have a lot of financial transactions occurring each month in their initial startup phase, but over time this can become more active and require more attention.
Many will outsource the bookkeeping and monthly reconciliations. However, it is important that the entrepreneur is involved enough to be able to manage cash flow, read financial statements and reports, and know when to dig deeper into trends sooner rather than later. I recommend using some type of cash forecasting tool that can quickly show early warning signs of any lack of working capital for the business, especially during growth and expansion periods.
3. Analyze key performance indicators (KPIs) on a monthly or quarterly basis depending on your goals and industry.
Leading indicators – such as cost of goods sold, overtime pay, and other direct costs related to producing your product or service – should be monitored more regularly because you may be able to control those costs to reach profitability goals. Most of your indicators will be lagging and take time to reveal trends like profit margins per product line, department or location. It is important to identify with your accountant or financial advisor which financial indicators you should be monitoring regularly to meet your goals or standards.
4. Evaluate overall financial performance, liabilities, and opportunities for reinvestment or paying dividends or bonuses.
Hopefully, your business has created a surplus of profit throughout the year and it’s time to decide how to distribute those earnings taking into account tax implications and shareholder considerations. Planning for expansions that require more equipment or improvements is also important. Determine the best uses of retained earnings and other sources of growth capital such as equity or debt.
Starting off with a good financial management system is key. If you need more help with this you should seek out a financial advisor or accountant to address your industry’s specific needs.
I hope that you will consider these tips when developing your own financial management plan.