Financial Health Checkup

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.

Cash Flow

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.

Expense Control

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.

Project Cash Flow to Meet Objectives

Objectives are the goal posts for moving your organization forward – adding staff, expanding locations or increasing capacity. Cash makes all of that happen. Reliably projecting when cash will come in and when it goes out may seem like an unnecessary exercise while you are busy running your organization. Not true! Cash flow projections are an essential tool for meeting your objectives.

Can you afford that new position or storefront? When will that new equipment pay for itself with added income? Answering these and other important questions depends on reliable and realistic cash flow projections. That’s great to know, but how in the world do you project your cash flow?

Three tips for projecting cash flow to meet your organization’s objectives:

Payment Commitments

Start by projecting payments that you know are going to happen. Some expenses, like payroll and rent, happen at a specific time, no matter what. Scheduled income payments, like retainers, are also known in advance. Plot out when those payments will come in and go out. Add other payments that are seasonal or occasional in the month or week that you expect or estimate that they will occur.

Past Experience

Past years’ payment history is a gold mine for projecting cash flow. What unexpected items have happened in the past? How likely is that to happen again this year? Timing when payments come in and go out highlights periods when you might be in danger of running low on cash. Seeing in advance that cash your cash will be tight gives you opportunities to make adjustments.

Invest to Keep Up and Grow

After plugging in all the known income and expenses, estimating the variable amounts and adjusting the timing, sit back and examine the results. Is there cash available to invest in technology, improvements or growth? Can you afford that new piece of equipment that you need just to keep up with the competition? Cash flow projections will help you answer those and other important questions.

Meeting objectives requires planning. Organizations need to reliably project when cash will come in and go out to successfully meet objectives, and to make adjustments when projections indicate that cash is about to get tight. Answer important questions about sustaining and growing your organization with reliable and realistic cash flow projections, and meet your objectives.

Financial Basics for YEA! Entrepreneurs

Last week, I was thrilled to discuss business finances with the 2019 Class of the Arlington Chamber of Commerce Young Entrepreneur Academy, also known as YEA! In the YEA! Program, entrepreneurs grades 8-12, develop their ideas into robust business plans and launch their business. YEA! Entrepreneurs also pitch their business plans to an investor panel and compete for funding.

YEA! Entrepreneurs, like all business owners, need to know about planning and managing their finances. We only had an hour, so we covered three basic areas that support every entrepreneur’s success, regardless of age:

Separate Business Accounts and Financial Records

Open a separate business account soon as possible to avoid commingling personal and business funds. Apply for a business credit card to support cash flow needs and to avoid putting business expenses on your personal credit card. Establish separate financial records from records used to maintain your personal income and expenses. Separating personal and business finances gives you an isolated view of your business so you can better track your progress. Separate records also help to establish that you are operating business, not a hobby.

Track and Monitor Financial Activity

Keep a record of all business income and expenses up-to-date. Updated records allow you a clear view of your financial situation at any point in time. Expenses should be tracked by category, such as rent and advertising, so you know where your funds are going. No particular system or format is required for your financial records. The IRS just requires that financial records are accurate, complete, and provide enough detail to identify the underlying source documents. Produce and review monthly financial reports.

Adjust as Needed

A budget is a plan for your income and expenses, to prioritize your activities and provide a baseline to monitor your progress toward achieving your goals. Assess the significant variances between your monthly financial reports and your budget. Focus on the income and expense variances that relate to the most critical areas for achieving your business goals. Didn’t meet your budget? Don’t see it as a failure; see it as an opportunity to assess your plan, adjust your activities and try again.

My time discussing business finances with the 2019 Class of the Arlington Chamber of Commerce YEA! was fun. The YEA! Entrepreneurs asked sophisticated questions and shared experiences in their own business that I learned from. I’m so glad that the future business world is in these YEA! Entrepreneurs’ capable hands!

When Does Your Business Need a CFO?

Bookkeeping is one of the first services that businesses outsource or hire for. Time running the business is too valuable to spend it recording transactions and running reports. A bookkeeper records your transactions, provides you with regular financial reports, etc., etc. All important tasks for running your day-to-day. Planning for growth or other long term business decisions requires analytical and management skills that focus on the broader view, not the day-to-day.

A Chief Financial Officer, or CFO, provides the analysis and financial direction that businesses need to get to the next level. Most small businesses can’t afford a fulltime CFO, but can afford to engage a CPA firm or financial consultant to perform the CFO role for a few hours a month. A part time CFO is a business investment in sustaining and growing your business.

Businesses need a CFO when:

  • Cash Flow Projections Aren’t Reliable

Knowing how much cash is available to run and invest in your business is crucial to keeping your doors open. Dire and expensive surprises happen to businesses that aren’t confident about their bank balances, revenues coming in, and payments going out. If monthly cash flow looks nothing like your cash projections, a CFO can establish a cash flow process that provides useful results based on reliable information.

  •  Budgeting is Ad Hoc or Doesn’t Happen

A budget articulates the financial resources needed to deliver your services or product, maintain your infrastructure, and invest in growth or improvements. It should be zero-based, or “built from scratch” to identify the cost of the resources needed for each budget category. For example, determine how many staff is needed to meet operational objectives and the “fully loaded” cost of each staff member. A CFO can help you build a budget that effectively addresses all applicable costs and revenues.

  • Prices Aren’t Covering Costs

Charging the same price as the competition might work for the other guy, but if it doesn’t cover your costs you won’t be in business for long. Pricing your service or product requires knowing your costs and understanding the value that distinguishes your business from that “other guy”. A CFO can examine your costs, identify the fixed, variable, direct and indirect cost components, and advise you on pricing and profit margins.

A CFO’s skill set and experience focus on the analysis, planning and management required to make higher-level financial decisions needed to get to the next level. Whether it’s growth, innovation, or sustainability, a CFO can provide insights and perspective to help achieve your financial and operational objectives. Getting a CFO is a business investment that pays you back over and over again, as your business launches to the next level.

Financial Duties of Non-Profit Boards

Last week’s blog post described some professions to keep in mind when recruiting finance-savvy Board members. This week, we talk about the financial duties of nonprofit Boards to fulfill the stewardship and oversight role known as “Fiduciary Responsibility.” Fiduciary responsibilities are legally defined. Failure to act as a responsible fiduciary has serious consequences.

 

At minimum, nonprofit Boards should focus on these four fiduciary duties to oversee the organization’s finances, and to avoid complications down the road.

 

  1. Establish Financial Policies

Documented policies are essential for establishing a common understanding and framework for overseeing the organization’s financial resources. Board-level financial policies define approval authority levels, investment objectives, risk tolerances, and risk mitigation activities to protect and preserve assets.

 

  1. Monitor Financial Performance

Board members must receive periodic, complete financial statements to oversee financial performance in relation to the budget, financial ratios, and other objectives. Financial oversight responsibilities can be performed by a Finance Committee but results must be reported to the full Board.

 

  1. Ensure Audit or Independent Review is Conducted

The Board must be familiar with financial statement audit and IRS information reporting requirements. If applicable, based on income and asset levels, the Board is responsible for hiring the auditor and receiving the audit results. Nonprofits with income and assets below the audit thresholds should consider an independent financial review.

 

  1. Take Corrective Action on Audit/Review Results

The results of any audit or independent financial review should be received by the Board or Finance Committee. Reported issues or risks should be acted upon. The action plan and progress on taking corrective action should be documented and reported on to the full Board.

 

Nonprofit Boards that address these four fiduciary duties are more likely to make appropriate financial decisions. Fulfilling these duties meets donor expectations to protect and preserve the organization’s assets and to ensure that regulatory and legal requirements are addressed.

Funding Business Growth

Business owners need funds to grow. Adding a service, product or program means investing in whatever it takes – materials, staff, space, marketing, etc. Most businesses don’t have extra funds piled up, waiting around to be spent!

 

So what options exist to fund business growth? Picking the best option depends on the circumstances, available resources, creditworthiness, and risk tolerance. How do you choose?

 

Start by considering these four funding options:

 

  1. Get a Line-of-Credit

Every business should have a line-of-credit, in addition to a business credit card. Get approval before you need the funds so you are ready to act when the time is right. No interest is charged until it is used, unlike a traditional loan. This option is attractive for business owners with a strong banking relationship and a good credit rating.

 

  1. Add a Partner or Investor

Involving a partner or investor could mean sharing ownership or decision making. With the right person and situation, it can be mutually beneficial. Adding a partner or investor requires a legal agreement that details each party’s responsibilities. It can also change tax reporting.

 

  1. Launch a Crowdfunding Campaign

Funding from a “crowd” does not involve giving up any ownership or control. Generally, successful campaigns are launched by those who know or have access to a large population of potential contributors. Avoid technology and compliance headaches by using a crowdfunding site vendor, who will charge a fee and/or a percentage of receipts.

 

  1. Tap your Personal Resources

Commingling business and personal finances is a bad idea. However, lending personal funds to your business could be a viable option, under the right circumstances. Treat it like any other business loan by documenting the details, charging interest, and setting up a payment schedule.

 

Business growth takes planning and funding. When it’s time to act on your plan, it’s crucial to have funds to invest. Having your funding options lined up and ready to go will help your business grow.