Do you “really” know your financials?

There is no better example of risk management than that of a Seattle heavy manufacturer who approved its annual budget in May 2008 and was ready for another banner year.  With five offices in three states and both domestic and foreign production, it supplied the construction industry for commercial and residential building. Despite the state of the economy, this company never had even a single unprofitable month.
What did management know and how did it behave to not only survive but thrive?

  1. It had a profit imperative from the owners
  2. It had forward-looking financials that gave it advanced warning; and,
  3. It was swift and relentless in reducing expenses to the level required to stay profitable

Imperative is a pretty strong word. The absentee owner required daily reporting and absolutely required a certain level of profitability every month. Management either produced the desired results or lost their jobs. No excuses — not even in a recession. Can your company live up to that standard?

Is your financial data timely enough to give you sufficient advance notice to make the necessary changes?  Do you already have a list of the changes you would make if revenue suddenly dropped? Does your management team have the guts to make the changes, or would the tough choices get bogged down in denial, territorial ego, and my favorite avoidance phrase, “Everyone will quit (or drop us) if we make those kinds of changes”?

It takes real effort to polish your crystal ball. Forward looking financials require a detailed budget with a solid understanding of the drivers of each key account. Daily transactions must be processed daily, including daily cash reconciliation, with key information reviewed by management every day and compared to (or trended to) the budget. You must have close (and realistic) relationships with your customers and analytical data that will inform you of changes in their payment status immediately. You must have an exceptional grasp of your industry and the economy as a whole to be able to interpret the more subtle changes on your financials. If you don’t have the resources internally, consider virtual CFO consulting services for assistance to help develop a strategic plan and create the reporting tools needed to be successful.