SurThrival: Financial Management

Tips to sharpen your financial management skills

Financial management and structuring is perhaps the most fundamental aspect of a small business yet often the most underemphasized by business owners. Particularly in an uncertain or declining economy, it is of utmost importance to evaluate your financial health and develop measures to maintain or improve it. This checklist can help you analyze your current financial management and determine ways of improving it.

 

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  • Regularly update and analyze your financial statements. It may be worth taking accounting classes or enlisting the help of a professional to maintain your financial reporting.
  • Maintain a separate set of financials for each business you operate, or for each branch or component of your business. If you only have one set of financials for your entire business or collection of businesses, it can be hard to spot problem areas and identify how each asset is performing. You may unintentionally be using a high performing enterprise to cover losses in a non-performing one.
  • Consider selling or disposing of underutilized assets from your business. Doing so removes them from your balance sheet and can increase cash flow.
  • Conduct what-if analysis to understand how different events could impact your business. For example, examine your cash reserves, lines of credit, tangible equity capital, net worth, and net assets and how they could change if your working capital, activity levels, profitability, income, and/or expenditures change.
  • Maintain contingency plans and stress-test your business, financially and otherwise. Some of the factors you may want to take into consideration are sales/revenues (in particular, when cash is received), changes in cost of goods sold, expenses, interruptions to operations, regulatory changes, a shifting competitive landscape, vendor issues, conditions of the market, and loss of employees to other jobs, family issues, death, etc.
  • If you are considering growing or diversifying your business, make sure you have the resources to manage changes. For example, if that expansion entails purchasing new equipment, real estate, etc., have you calculated how leasing vs. buying would affect your current and future cash flows?
  • Construct or review potential exit strategies. Are they viable given recent or expected changes in your industry and operating environment?
  • Work to improve your budgeting process. Do you find that your forecasts often fail to reflect your actual needs? Could your budgeting process improve by involving people from different departments?
  • As costs and sales levels fluctuate, regularly conduct breakeven analysis. Do you know how much costs would have to be cut to compensate for a given decrease in revenues?
  • Brainstorm and implement cost-cutting measures when possible. Can you leverage relationships with vendors to get better deals on goods and services, for example?
  • Develop improvements to your accounts receivable and accounts payable practices. Can you offer incentives for customers who pay early or require cash upfront for customers who are increasingly delinquent in their payments? Are you taking advantage of any incentives offered by your vendors for early payment?
  • Do not let your dividends or payroll bonuses eat up your earnings. Cutting back on such expenses can increase your business' net worth and profits.
  • Consider where you are in the "payment food chain" and how that could affect your cash flows. Do you receive cash up-front for the sale of goods or services, or is there a lag that could cause problems for your cash flow if some of your customers fall behind in their payments? How can you plan ahead to avoid getting caught in such a situation?