Lack of Financial Control

Those people who have worked with me know that I am not an accountant, but this does not detract from the fact that I am a great advocate of management information.  In fact, I am often staggered that businesses, usually smaller ones, have managed to survive at all without it and I would hypothesise that there is a correlation between the lack of adequate financial control and likelihood of distress.

For an expert view of MI, bring your accountant in to discuss which measures to follow and how to set them up.

However, my simplistic overview is as follows.

Cash-flow forecast:  Using the income & expenditure headings from your last set of accounts, create a spreadsheet of CASH in’ and out-flow for a period of at least the next 3 months.  You may be able to condense the headings to keep the data straightforward, but the key is to capture every outgoing that you will have to pay for and each income that you will definitely receive within this period.  Where you are uncertain it is best to err on the high and early side for expenses and low and late side for income, but try to be as accurate as possible, both in the amount and the likely timing.

This will immediately give you a sense of whether you are going to run out of cash and if so, when and by how much, but it must be updated weekly or monthly to remain accurate, rolling forward by the same period each time.

Costing Systems:  These will vary by business, but some of the measures that are generally invaluable are as follows:

Staff utilisation, which requires the use of time-sheets, enables you to allocate accurate employee costs to products & services and to accurately charge customers.  It also enables you to see how much of the time that you are paying for in salaries is being used to generate revenue.  There is a natural tendency for staff and Directors to fudge the collection of this data which is why every member of the team, including the MD, should complete them, every day.

Profit is surely the key raison d’etre for companies, unless they are charities, thus it is vital to measure it not just after the end of the year, but on an ongoing basis.  Companies should, at the very least, know the accurate profitability of each client, of each product, service or line and also of each sales person’s portfolio.  This enables strategic decisions to be taken about, for example, which clients to over-service and which to resign, which products or services to develop and which to redesign and which sales people to reward and which to remove.

An absence of this information makes these decisions pretty much impossible for anyone other than a highly gifted crystal-ball-gazer.

Budgetary control:  An absence of predetermined and agreed budgets for overheads, marketing, client hospitality, research & development, staff development and so on generally suggests a lack of strategic planning.  An approach of ‘we’ll spend some money there if and when we make some’ is actually a quite effective plan to fail. 

Time needs to be spent considering what the requirements of the business will be in each of these areas, what the benefits of spending money will be (and conversely, the risks of not spending money) and then an overall allowance divided accordingly.

Budgets then need to be monitored and fine tuned according to key performance indicators (KPI’s).

KPI’s:  These will vary from business to business, but they might (hopefully) encompass some of the profitability measures listed above as well as indicators for customer satisfaction, employee retention, delivery times and so on.  There’s an old adage that says ‘what gets measured gets done’ so the key here is to distill a small number of key indicators for your company, bearing in mind my comments below. 

Note that the information I’m suggesting above is not for show.  It takes time for someone to generate and the opportunity cost  of that person alone should suggest that it is kept to a minimum, but it needs to be engaged with and acted upon.  If, for example, your sales & profitability has been declining for four quarters in a row and you are getting low on cash, you need to focus attention on addressing the underlying issues. 

In this case it might mean reducing overheads, resigning unprofitable clients to free up time to service more worthwhile ones, redesigning products or services to reinvigorate sales and rescue profitability and so on.  NOW!

If you are reading this with no MI or are embarrassed because you don’t understand the MI you do have, I have a suggestion.  Either schedule a meeting with your accountant and sort it out, or alternatively, email me with a top-line about your industry and size of company and I’ll ping back an email with some more tailored suggestions.

Either way, now is the time to ACT!

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