5 Tips for Developing Financial Intelligence

Guest blogger: Susan Hammond, Principal of scHammond Advisors

If you are a business owner unaccustomed to reviewing financial and operating information on a monthly basis 2009 would be the year to start. This is simpler and far less painful than you think. You just need to know what to look at and look for.

Monthly financial statements are a necessity. You need them to obtain financing, keep your advisors and board happy and provide you with certain financial & operating data points (or key performance indicators (KPIs)). So it’s important someone in your company perform the daily functions to keep the books in order.

Not every number is meaningful…the key is to figure out which numbers you need to review and have them reported to you on a regular basis. Think of the questions you repeatedly ask your bookkeeper…the answers will become the numbers, financial and operating, you will need to see regularly.

Examples of financial & operating data points or KPIs are:

• Billable hours which all professional service firms track. These can then be converted into anticipated revenue.
• Units produced & shipped which a manufacturer tracks.
• Average daily sales, possibly by location, and average sales by customer are of interest to a retailer.
• Cash on hand (i.e. the book balance not the bank balance)
• Average number of days to collect accounts receivable.

Here are a few practices you can easily adopt:

1. Get a daily cash report: what was received, what was paid out and the ending book balance. Don’t forget to consider electronic funds transferred in and out.
2. Review the aged accounts receivable and aged account payable reports weekly. Which of your customers are getting behind in payment? Which vendors do you owe?
3. Track the amount of unfilled orders or projects, both the number and financial value. What is normal for your business?
4. Track outstanding purchase orders (POs), an indicator of future cash needs. Will an indicator of future cash needs an indicator of future cash needs you have the cash to pay for the products or services ordered?
5. Prepare a monthly budget for the next year. If is this is the first time, use the 2008 yearly financial information as a start and adjust for new information.

In 2009 staying on top of key financial and operating data and responding swiftly to negative trends may be the difference between staying in business or not.

Susan C. Hammond is a former CFO who now runs scHammond Advisors, a firm that partners with small business owners to build sustainable companies. She provides advisory board facilitation, financial intelligence and business coaching and consulting services. To learn more visit: www.schammond.com.