Would you drive your car on the interstate without a speedometer, gas gauge or a clear windshield? Reviewing your monthly financial statements to understand your organization’s financial health is like watching the gauges to ensure you are staying on track.
So, how do you do it?
Keeping a financial grip on your business really involves two key components: 1) Understanding financial terminology and your financial statements and; 2) Reviewing and acting on your financial results within a disciplined cycle. Once you set up this process and make it habit you will run your business with more confidence and success.
First – Close the books on a timely basis each month. This is the accounting side of producing the financial statements. Submit all banking information, adjustments and accruals because ongoing transactions and other factors drag the closing process out for weeks. The addition of electronic bank and credit card statements can speed things up, but priority needs to be given to closing your books and producing financial statements within the first week of the following month.
Next – Review significant spending items and variances to budget and/or to the same period last year. Understand and explain revenue differences in terms of price and volume, expense differences due to price increases, decreases or different levels of spending tied to key business events. Complete this activity by the 15th of the following month.
Finally – Make operational adjustments based on the financial review and revise your future forecast. If revenue is down, for example, decide what needs to be done with pricing, marketing, or production to adjust for the shortfall. If expenses are up in a certain area, make decisions on how future spending needs to be modified. Complete this activity by the end of the third week following the end of the month.
Depending on how things are going these “review and adjustment” steps can be simple or more involved. One thing is for sure though. Regardless of the type or size of your business, understanding and keeping a steady eye on your financial results is critical to your long term success.