Cash is not Profit, and Profit is not Cash…

While cash and profits are closely related, one is not always a reflection of the other.  Developing an understanding of how cash and profit relates to building a healthy business is often a painful learning experience for entrepreneurs.

One of the first questions new companies DO NOT ASK is what do we need for financial management and accounting reports to manage my business profitably and put proper internal controls in place.  (Internal controls are the basis steps and procedures that a company uses to reduce error and mistakes as well as to prevent fraud or theft from going undetected.).

All too often start-up companies go with a “quick” solution because it appears to be easy and inexpensive.

At this early starting point, investing a few hours to consult with a part-time CFO, who has business operations experience, can pay big dividends later.  The PT-CFO can help you select the accounting software that best fits the early stage as well near terms needs of your company.  Even if you opt for a quick solution, getting the accounts and reports set-up correctly at the start will give you the management data you need on day one and save hours of work later making changes that could have been avoided with an hour or two of conversation with a CFO resource.

Below are basic goals, objectives and types of reports you should be thinking about for your business.

  • Financial reports should be issued on a regular schedule
    • Cash should be recorded and reported every day.
    • Today the majority of companies should have the month closed by the 10th to the 15th of the next month at the latest.
    • Make getting sales invoices/billing out as fast as possible should be part of the company culture.  Depending on the business daily/weekly/monthly.
    • Use simple financial closing practices that reduce the need for big end of quarter/end of year adjustments.
  • Data is out of date before you see it.  Set up your procedures to insure that data is accurate the first time.
    • All transactions should be recorded within the business day or first thing the next day for late end of day items.
    • Budgets and Estimates need to be updated periodically and be available real time.
    • Waiting for month end or the end of a project to end to learn if you made a profit is bad risk management.
  • You need to have these reports, understand what they mean and know where data comes from:
    • How much cash did I payout last month?
    • How much cash did I collect last month?
    • How much cash do I need to cover expenses for the next 13 weeks?
    • Who are my most profitable customers/clients?
    • What are my most profitable products or services?
    • Who are your most profitable employees? (critical for service companies)
    • How does my business development forecast compare to my budget plan and actual financial results?
  • Top line Revenue Growth with no bottom line improvement is a common problem with young companies
    • Sales are increasing, but the bottom line is not.
    • Delays in completing reports and inaccuracies make it difficult to understand the relationship between Sales and Net Income.
    • Real time data is needed to take action in a timely manner.

With a bit of planning setting up your systems and procedures to supporting your company’s growth puts you in the driver’s seat with the information you need and avoids headaches later, when is more time consuming and costly to make changes.

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