Calculator and worksheet to illustrate concept that bookkeeping is just the beginning.Having a handle on your books is a vital part of understanding the critical components of your business from a historical perspective. What were your revenues last month, last quarter, last year? What did you pay in rent, payroll, general and administrative expenses, etc.?

How much did you bill your clients last week? These are just a sample of the types of questions that you could answer if your books are properly managed and up-to-date. Additionally, accurate books assure compliance with a variety of regulatory and government agencies, including sales taxes, federal/state/local income taxes, payroll taxes, workers’ compensation, unemployment insurance, disability insurance, etc.

Given the importance of having efficient accounting records, it is surprising how many companies we encounter that fail to capture all the components necessary to present an accurate picture of their finances at any point in time.

Creating a good set of financials begins with certifying that the data entered into your accounting system is both accurate and timely. You can do this with either automatic feeds (such as from your bank and credit cards), or manually (e.g. when you create an invoice directly in the system).

There are a variety of systems that can be integrated with your accounting system that will reduce the number of errors (and therefore the amount of rework) as well as increase the accuracy of the data that is being produced. It is imperative to have accurate and consistent data as you will be using this to make potentially major strategic decisions. The need for quality data cannot be understated.

However, a business cannot be managed with reports, generated from your accounting system, alone. No matter how good those reports may be, it is critical that you be able to create a comprehensive picture of not just where your business was or even is, but where will it be. In other words, you need to have an understanding of the historical trends (for which your accounting results are key), and then use those trends to forecast where the business will be in the coming year(s).

For example, if you know that the days outstanding on your receivables has increased by 50% over the past 6 months, then not only should you improve your collections processes, but make certain that your cash flow forecast assumes an increase in your days outstanding until such time as you are able to effect a positive change in your collections timing.

Creating a robust financial model enables you to forecast where your business is headed based on your actual historical results. More importantly, by adding the “knobs and dials” to the model, you can easily perform “sensitivity analysis” for those key performance indicators that make a material impact to the future of your business.

This “what if” analysis (or scenario building) enables you to see what happens if, for example, you expend an extra $5,000 per month on social network ad spending. That additional cost could translate into $15,000 of additional revenues which, based on your margins, would provide an additional $6,000 in net profits to you (after paying the costs of goods for selling your product or service). There are many ways to build a good financial model. See our article on the topic here.

Models can get quite complex, depending on the complexity of your business, the sophistication of the team maintaining it, and the amount of time you wish to devote to managing the data that goes in and the resulting output.

We have found that sometimes the KISS principle is useful in this practice: Keep It Simple Spreadsheeting. While having all the minutiae about your cost of goods sold, by SKU, for 100+ SKUs across 4 divisions, might make sense for a merchandising planner, it doesn’t make sense to build such an intricate system for strategic financial decision-making.

Here’s a quick summary of how to improve the finance function in your business:

  • Step 1: Ensure your books are accurate and you have proper processes and controls in place. It is not necessary to run a complete “audit,” but having an independent pair of eyes review the data that is in your system, how it is maintained, and the checks and balances that you have in place (or not) is a smart first step.
  • Step 2: Create a financial model that is robust enough to enable you to answer the important strategic and tactical decisions that will ensure corporate growth, but simple enough to make it easy to build and maintain. As important, the data must be driven off your historical results (from your accounting system) and any other systems that drive the business. You must have accurate data feeding the model to avoid the “garbage in…garbage out” problem that is so common across data-driven systems.
  • Step 3: Perform “sensitivity analysis” on your model by adjusting the key performance indicators (up and down) and assess the impact to your monthly/quarterly revenues, expenses, profits, and most importantly, cash flow.
  • Step 4: Establish proper governance. Create a team of advisors that can oversee the results on a regular basis. For smaller companies, a group of 3 people is a good target: the founder/CEO, the person responsible for Finance (either in-house or a consultant), and an advisor. For larger companies, this group might be expanded to include a member of the Management Team.
  • Step 5: Create a monthly “rhythm.” There is a rhythm to the accounting and finance workflow process. This rhythm (or cadence) can be relatively simple for startup companies and can grow increasingly complex when the business adds product lines, investors, employees, divisions, Board members, etc.

Once you have these steps in place, the final piece of the puzzle is taking ownership of the information that your team is providing to you. It is not necessary to understand every debit and credit. However, it is encouraged that you look at the big picture and what the data is saying about both the positive and negative trends in your business.

Familiarity with your books and routine assessment of them is key to creating the aforementioned “rhythm.” Urge your CFO to provide you the optimal forecasting that relies upon your company’s key performance indicators. Make sure that he/she drives the planning and more, that he/she is able to implement necessary changes, not simply “budgeting”for your business . You’ll want to partner with a CFO that not only understands your vision for your business, and the need to scale it based on data, processes and controls, but also how to make that happen.