Monthly Archives: March 2017

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Business Owner Mistakes: Not Keeping Company Books and Records Up-to-Date

closing

It’s an all too common problem.

Despite the importance of up-to-date bookkeeping, I often see small and mid-market companies, startup companies, and medical and dental practices that don’t keep their books 100% up to-date and 100% accurate.

They have no ‘formal’ month-end financial close processes in place and do not review their financial metrics.

This is a bookkeeping fundamental, so important to all businesses.  The discipline of staying up-to-date and doing regular reviews creates a sense of team accountability and almost always improves results. Then why don’t companies do this?

Sometimes, it’s lack of interest in numbers. Sometimes there is fear of what they will discover. And sometimes, it’s simply that no one has established consistent, simple procedures to streamline all processes, including the important month-end close.

Sometimes we as business owners avoid the simple truths of seeing our actual results.  I was a 25% owner of a small $1.5mm mechanical services company several years ago.  We make this mistake with our books for about a year.  We were relying on the controller, and we believed the financials up to date and accurate.  Wrong on both.

There was no closing practice, and we didn’t formally review the monthly numbers as a team.  As it turned out, the balance sheet was a mess.  We significantly underestimated our liabilities and overestimated our assets.   We were so engaged in top line growth that we were blind to the basics of a financial footing with a formal month-end close and review process.

In hindsight, we would have been able to make much better decisions and know of upcoming pitfalls and cash needs if we’d had a process for closing and review every month.  As it was, we had to really hustle to save the company and ended up selling it for a sizable loss.

Your company needs a basic month-closing process that includes

  • Reconciling the cash accounts, and all balance sheet accounts to the subsidiary ledgers.
  • Ensuring journal entries are recorded and all transactions are in the correct period.
  • Finalizing monthly financial statements with the actual results summarized and the vital few measures are compared to the operating plan.
  • Discussing the differences between anticipated and actual, and developing action plans to get on, or stay on, the right path.

With today’s bank feeds into most integrated accounting systems, the month end process is much easier, but it still certainly takes some care and the human touch.  Depending of the revenue model and overall cutoffs, the close can take several days, but make it a practice to finalize as soon as possible after the end of each month.

I like a simple checklist approach with all balance sheet support schedules and P&L analyses on one Excel file on the network drive. (See my resource page for a free downloadable checklist.) Have a consistent month-end review scheduled on your calendar every month and sit down with your team to go through the numbers. This can keep those doing the books focused on finishing so they can be ready for the meeting.

With the experience with the HVAC company rooted in my mind, I make sure all of my clients have a monthly schedule to go through a simple month-end checklist.  The financials are produced consistently on a timely basis each month.  We have a recurring monthly calendar appointment go through the numbers with the respective teams.  That is the only way to know where each organization stands, and position us to make the best decisions to keep it as healthy as possible.

Need help developing a closing procedure for your company? Contact me!  Subscribe to receive my free paper on 10 Common Mistakes Business Owners Make.

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Business Owner Mistakes: Not Developing a Strong Operating Plan

 

accounting plan

 

An operating plan is your complete financial forecast of where your business is going, including the income statement AND the balance sheet. It is more than just the typical budget I see at most of the companies I help.  Your operating plan helps drive and predict profit and cash flow. It shows your business leverage improvements and valuation changes.

When you own a business, it’s essential to know where you want to go financially. If you don’t know where you are going, any road will take you there. The better your forecast results, the more easily you can see the bumps in the road (hopefully avoiding them), the better you will perform, and the better you can predict the future. (And the better you will sleep at night!)

Your operating plan consists of these elements. For most small businesses, it’s about five pages:

  • Income statement (sales, operating margins, expenses.)
  • Balance sheet (what you own and what you owe)
  • Cash flow records.

Creating an effective operating plan is part art and part science.  The “science” is your historical results and the overall process to develop the document.  The “art” is everyone’s ability to predict anything. Face the fact that your forecasted numbers are going to be, by definition, wrong. Still, that doesn’t mean you don’t do them.

To build your plan, take these steps:

  1. Forecast the income statement. Do this on a somewhat granular level on a monthly basis.  Understand the revenue drivers and measure critical success factors; average sale per customer, transactions per service sector, inventory turnover, capital assumptions, etc.  Develop the sales plan we discussed before.  Understand product cost, gross margins, and production capacities. Estimate personnel needs to develop the personnel plan; know capital expenditure needs and timing.
  2. Forecast operating expenses.  This is generally a straightforward exercise, but be specific by month. We have a tendency to flat line expenses on the P&L which looks good on paper, it’s not the best way to accurately forecast.
  3. Reference your cash flow. The income statement with cash flow drivers and balance sheet assumptions auto-populate the forecasted balance sheet and cash flow statement.  Another mistake many business owners, entrepreneurs, and medical practices business offices make is they don’t understand the three basic financial statements.  Again I recommend looking at Dick Purcell’s book Understanding a Company’s Finances with the Financial Picture. Develop your ability to accurately track and foresee your cash flow.  (Click here for my resource page, with other helpful tools.)

Once you have built your plan, prepare a two-page summary of significant assumptions to prompt conversations with your team about strategies to improve these assumptions.

Don’t forget to compare your actual results with the operating plan. Compare the actual results to the plan’s income statement and balance sheet and the assumptions, analyzing all significant variances.  We use this instant feedback loop and what we learn to improve the forecast assumptions going forward and work on improvements.

Let’s be realistic, the better you can forecast, the better you see things coming; the better you will sleep at night.

This is a living and breathing process.

TIP: Remember small gains over time can lead to awesome results. A potentially simple idea to improve accounts receivable turn over can increase cash flow remarkably.  Here’s a spreadsheet that shows a $1.2mm improvement in cash with a 6 day accounts receivable turnover improvement.

Need more guidance? Contact me! Be sure to subscribe to receive my posts by email if you don’t already, or share with a friend!