A Good Financial System
Originally published: 09.15.11 by Ruth King
5 activities to keep you on track.
Over the past several months, I’ve written about the pieces that comprise a profit and loss statement and balance sheet as well as how to ensure that these financial statements are formatted correctly. A good financial system is based on both the monthly financial data and weekly information you gather.
Here are the three monthly activities that you must do based on the financial information you receive. These activities take less than 20 minutes to complete, so there is no excuse not to do them.
1. Financial statements must be accurate and timely. Timely means that you receive them no later than the 15th of the following month. For example, September’s balance sheet and profit and loss statements should be on your desk no later than Oct. 15. Any later than this, and it’s usually too late to act on any minor issues you see. They are already on their way to becoming major crises.
2. Calculate the 10 critical financial ratios for that month and put them in a spreadsheet. (See the example that accompanies this column). I wrote about how to calculate these ratios in my April and
3. Calculate your monthly and trailing data — sales, gross profit, overhead, and net operating profit. These graphs will tell you the overall direction of the company. (I wrote about how to calculate these graphs in April 2011).
If you find that these ratios or the trailing data are not trending in the right direction, do something to fix the issues before you have cash-flow problems.
Here are two weekly activities that you must do in a good financial system:
1. Weekly cash-flow report. Cash is the lifeblood of your company. Profits are important, but cash is more important. The weekly cash-flow report should be put on your desk by your bookkeeper every Friday. Completing this form takes about 15 minutes. It will tell you whether you have enough cash to pay your bills and payroll the following week. If you have cash in savings, it tells you whether those savings are being depleted or added to.
2. Weekly maintenance-agreement tracking. If cash is the lifeblood of your business, then maintenance agreements are the backbone. They create stable cash flow. You should know how many residential and/or commercial agreements clients you have, the number of agreements up for renewal, and the number that were renewed that week. You want the report to show renewals of at least 80%, and maintenance-agreement customers increasing.
These five activities will help you discover whether your company is moving in a positive, profitable direction.
Articles by Ruth King
Understand Your P&L Statement: Gross Margin, pt. 2
Gross margin should not vary more than a few points each month. If it does, then you must find out why the margin is varying.
Understand Your P&L Statement: Gross Margin
Understand Your P&L Statement: Cost of Goods Sold
However you decide to categorize expenses in your P&L, it's important to be consistent.
Understand Your P&L Statement: Sales vs. Revenue
Sales are critical to survival — when revenue is actually generated is even more critical.
The 20 Percent Profit Myth
For a realistic goal, include owners’ compensation in the net profit equation.