We just passed the half-way point in the year. A perfect time for your organization to get a financial health checkup! Think about it…your personal health and your organization’s financial health are very similar. Serious problems could exist that you cannot see or feel without a checkup. A sudden loss of income or an unexpected expense can stop your organization, just like a medical crisis can stop your body.
Organizations should do a financial health checkup that covers these three areas:
Actual vs. Planned Finances
Financial performance should be compared to planned, or budgeted, performance to determine how actual events compare to what you thought would happen. Focus on variances in income and expense categories that most significantly impact achieving your organization’s goals. If the budget or plan was not met, figure out why. Did conditions change? Were projections unrealistic? Focus on “why” and use that information to refine future budgets and plans.
Project your cash inflows and outflows for at least three months, preferably for six months or more. Determine whether expected income will cover expected (and some unexpected) expenses. Sounds easy, but this projection and analysis will take 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.
Spending control 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. Ensure that planned expenses are within established plans or parameters. Carefully consider unplanned expenses to ensure that they are aligned with the organization’s objectives.
Your organization’s finances, like your body, should undergo a periodic checkup to alert you to existing or impending problems. 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.