There are many accounting tasks that can be delegated, such as data entry and reconciliation, but high-level accounting decisions cannot be delegated. I wrote this article in the hopes that it will provide a clearer picture on how business owners can make more informed financial decisions.
Are you at risk for any cash shortfalls in the next six months?
A monthly financial review should always begin with a discussion about the company’s runway. It’s crucial to anticipate any potential cash crunches well ahead of time. The cash flow forecast also provides a great segway into discussing next steps. Are you likely to hit a shortfall? If so, what options do you have? Do you have excess cash? If so, where can you reinvest the excess to accelerate your business growth?
What’s in the sales pipeline?
Look at the current estimated dollar value of leads, proposals, and potential deals in the works. I recommend considering leads “dead” by default based on set criteria, such as the amount of time elapsed or number of touches. That dubious web form inquiry from six months ago who hasn’t responded since?Doesn’t count. How likely are you to hit your revenue targets based on current deals in the works? What does your prospecting routine look like? Do you have a way to track sales activity?
Are your customers paid and current?
It never ceases to amaze me how often business owners ignore their receivables until the bank account runs dry. You can start off by regurlarly looking at the accounts receivable aging report, but you may need to drill deeper. Who has agreed to pay, by when? What steps have been taken to contact the customers who are behind? Is there anyone who needs to have service suspended? Has anyone agreed to pay and then not followed through?
Everything hinges on the collections process. What is the practice for writing off bad debt? Does an outside collections agency get involved? Are net 30 customers required to submit a credit application? Small business owners are too often guilty of “doing business on a handshake” instead of properly onboarding new customers, which can often lead to uncollected receivables. It’s always better to collect your money up front and eliminate receivables altogether, but if people do owe you money, the totals need to remain in your field of view on a regular basis.
Was last month’s cash flow better or worse than projected? Why?
Cash flow forecasting is not an exact science. Regular reality checks and tweaking are essential to keep forecasts accurate. I recommend capturing regular snapshots of what was projected each month and comparing to actuals. (Quickbooks and other accounting software has a “budget vs. actuals” feature that can be used for this purpose). I’ve done cash flow forecasting by hand with a spreadsheet, and it’s not hard. You need to compare expectations to reality regularly.
What’s your profit by customer or job?
I’ll be blunt; breaking down profitability by customer and project takes a lot of heavy lifting. You will need to separate cost of goods and identify when materials were consumed (vs. when materials were purchased). For instance, let’s say a construction company buys rebar in bulk and uses the material on several different jobs over the course of a few weeks. The bank ledger will show one transaction when the material was paid for, which reveals nothing about any individual job costs. Tracking inventory by lot number might be necessary (even if materials are expensed upon purchase and consumed shortly after). Job costing is hard work that a lot of clients aren’t willing to do. But businesses that are serious about growing understand that they need to know their cost structure.
How is your advertising performing?
If a client spends on advertising each month, what sort of reporting is available? Lead generation campaigns such as organic SEO, paid search, paid social, etc. should be very measurable. Other forms of advertising (like billboards, print media, direct mail, etc.) are not as easy to measure, but there may be options for increasing trackability. For instance, a company can use a dedicated phone number, QR code, or web URL tied to a specific ad campaign. I’m not suggesting that ads are easy to track. Not by a long shot. But I will say that a company should make every effort to make advertising ROI as measurable as possible.
Was our labor cost in line with benchmarks? If not, why not?
Where is payroll going? What are people spending time doing? Is there a time-tracking mechanism in place that employees use to record which project they worked on during each block of time? Did someone spend 8 hours working on a project that the company stopped getting paid for 3 months ago? Are benchmarks identified to define the approximate number of hours considered normal vs. excessive for each project based on scope? Is all time being billed? How is scope creep managed? When payroll cost is tied to specific jobs, a lot of issues get fleshed out.
Are we seeing any excess shrink, spoilage, waste, or other abnormal materials cost?
Unusual patterns in shrink, spoilage, or waste can signal operational issues, laziness, or even theft. None of the above can be tracked at all without an inventory control system in place.
What support do we have for each item on the balance sheet?
Balance sheets are notoriously neglected by small businesses. I’ve met business owners who haven’t looked at their balance sheets in a decade and couldn’t even tell you what a balance sheet is. It’s never a problem until there’s an audit, until the bank asks for financial statements while considering the company for a loan, or until the company is up for sale. Left untended, the balance sheet can become an ungodly mess that can take months to untangle (“What do you mean we have ‘negative’ $250K in accounts payable?”)
I recommend creating a documented month-end close-out process for every client. Depending on how complex the financials are, month-end may need to include supplemental workpapers that provide a breakdown of each balance sheet item. For instance, are your payables and receivables true? If inventory is tracked on the balance sheet, how often is the physical count reconciled to the books? Are loan payments broken out monthly into the principal & interest portions? Does the balance sheet show an accurate and up-to-date view of the current and long-term portions of loans?
How did everyone do on hitting their numbers last month?
Does the company have the ability to slice the P&L by team member? How much did each team member contribute to the bottom line? The answer depends on the type of operation. If every team member is independent and operates in a silo, bottom-line contribution is easier to measure (commission salespeople). If everyone works on a team and everyone touches all of the work (e.g. an assembly line in a factory), strategic decisions need to be made about the pathway for measuring everyone’s individual output. Sometimes, measuring contribution requires rethinking how roles are structured. You might use billable hours or deliverables, depending on how your clients pay.
Obviously, the questions raised here are only scratching the surface and I painted broad strokes to give a general idea of how accounting practices can look. The specifics vary from one industry to the next.
If you are a business owner and you are frustrated with your bookkeeper’s inability to give you more insights into your financials…
Or if you are a freelance bookkeeper and you’re looking to stand out from the crowd by learning to provide your clients with the answers to questions like these…
Then grab a time on my calendar and let’s talk.
