Your personal health and your organization’s financial health are the same in at least one way — serious problems could exist that you cannot see or feel. A sudden loss of income or an unexpected expense can stop the heart of your organization just like a medical crisis can stop your body. For your organization, like your body, monitoring a few key areas can alert you to problems on the horizon.
At a minimum, organizations should monitor financial health in these three essential areas:
- Actual vs. Expected Financial Activity
Financial performance information should be compared to planned, or budgeted, performance to determine how actual events compare to what you thought would happen. Focus on variances in significant income and expense categories. Obtain explanations for why the budget or plan was not met. Did conditions change? Were projections unrealistic? Focus on “why” and use that information to refine budgets and plans.
- Cash Flow
Project your cash inflows and outflows for at least three months, preferably for six or more. Assess whether income that you expect to take in is going to cover the amounts you need to pay. Sounds easy, but this analysis takes some thought and effort. You need to know your payments receivable and payable, regular payments that are required no matter what, such as payroll and rent, and your reconciled bank account balances. Be realistic about payment timing and what it really costs to sustain your organization.
Maintaining control over spending is the most important and most difficult part of running an organization. Demands to fund day-to-day operations, in addition to investing in technology and infrastructure, are constant. Prioritizing essential expenses and growth investments is a challenge that requires regular attention. This is particularly true in newer organizations where infrastructure investments are most crucial.
Maintaining your organization’s health is a lot like managing your personal health. Monitoring a few key health areas can alert you to problems on the horizon, and give you an opportunity to act before it’s too late.