5 practical financial management tips

1.  You Can't Reconcile Your Bank Account "Too Often"

Most  people who work in the bookkeeping think  its best to reconcile your bank account once a month to your bank statement.  That's false.

The best bookkeepers (yes, that includes office managers, and DIY-bookkeeper-business owners!) reconcile the bank account in their accounting software  every day to the online balance.   

Every day?  Yep.

Do you have to reconcile it every day?  No, the circumstances for every company are different.   

​The higher the transaction volume, and the more research your bank transactions need, then the more often you should be reconciling.  For many companies every week is okay.  But you shouldn't wait until the end of the month.

Think about the principles behind this:

• If you reconcile your bank account every day, you know your accounting system is always updated accurately through "yesterday."  You only have to do the bookkeeping one day at a time, never a whole month at once.
• Your accounting system is always updated with the real available cash balance.
• Once you get to the end of the month, publishing financial statements very early in the next month is quick and easy.
• You don't spend time trying to figure out "what was that transaction from three weeks ago that hit the debit card?!?!"

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This idea makes many bookkeepers uneasy at first, because  they're taught to reconcile to statements.  So, YES, on the last day of the month, you should ALSO reconcile to the statement.  Then you've complied with that accounting best practice as well.

2. Clean Up Rogue Transactions Monthly

You know the ones... every company has them...  the negative accounts receivable balance that's been in the accounting system for a year.   The uncleared check from 2015 that you've been ignoring in your bank reconciliation month after month.

The difference between a bookkeeper and a Controller is usually is: bookkeepers get 95% of the transactions right.  Controllers have a system to identifying everything that isn't in its rightful home in the accounting software, and don't consider the situation closed until everything is accounted for properly.

To avoid messy books, don't allow your records to have those few transactions that need attention and are oh-so-easy to pass over every month.  

3.   Making  Payroll Is The Top Priority When Cash Is Tight

Despite the pressure many business owners feel to cover the short term goals, the true fundamental objective of any business is to make sure it is still here to operate in 10 years, 20 years, etc... 

Continuity of operations... surviving to fight another day...  should always be the top priority when resources are scarce and finite.

When a business doesn't have enough cash to pay everything that's due, the top priority is on anything that will grind operations to a halt if that payment doesn't get made.  At most companies, that's payroll.  Once a payroll is missed, a domino effect of problems gets  set into motion (starting with: some of your employees might not come back to work!) that has the highest risk of ending with: Your business no longer operates.

So when you're analyzing your cash, and considering what you should pay with the dollars you have, always keep in mind the amount by which you'll clear your next payroll based on the assumptions you have today.

4.   Good Business Managers Identify Leading vs Lagging Indicators

Analyzing the financial health of your business based on the cash in your bank account each day is a recipe for risk and failure.

Analyzing your business based on what your cash is GOING TO be in the future... that's a much better way to understand your company's financial health.

Think about how cash works at a typical professional services company, for example.  In order to receive a dollar in cash from a customer, these things need to happen first:

1. First,  the company needs to identify that potential customer as a prospect in the sales process.
2. Then,  the company decides what to propose to the prospect based on their needs and the services available.  This involves scoping the work, talking with the prospect, or otherwise analyzing how to get them to sign a contract.
3. Then, often a proposal for services is issued.
4. When the proposal is accepted, that leads to a contract or services agreement.
5. Then, the company needs to actually do the work, so that an invoice can be sent.
6. Next, once some work is completed, a bill is sent to the client.
7. Then, the bill gets paid. Ahhh, finally.  The cash inflow we've been waiting for.

So, if the business owner wants to make decisions to improve the financial health of the business, should that be based on the cash balance today, or leading indicators of the cash balance in the future?

The future cash balance at this company will be better or worse than it is today based on:

• The number of sales prospects in the sales pipeline.
• The number of proposals sent out.
• The number of customer agreements recently signed.
• The amount of work the team is doing that hasn't been invoiced yet.
• The  current accounts receivable balance (work invoiced, but not paid yet).

Good business owners  look at their cash balance - but only as a check to make sure their leading indicators are having the direct relationship to the future cash position that they're expected to have.  The real success is in knowing where the business is going to be at future points in time, and making decisions to optimize where the company will be in the future.

5.   Your P&L and Balance Sheet Reports Should Always Show TRENDED (Months as Columns)

Knowing where you are isn't very helpful if you don't know where you're going, and you can't tell where you came from.  That's why every time a business owner is shown a profit & loss report and a balance sheet, they should show the trend of periods leading up to the current one.

​Financial statements should either 1) validate the business owner's expectations about what he/she thought the numbers would say about this period, or 2) surprise and inform the business owner  about the operations of the business through the numbers.  

In either situation, the context... the expectations of "what should I have expected each of these numbers to be?" is the key comparison to actual performance.

If a company spent $2,000 on office supplies this month, is that good or bad?  It depends, right?  The manager of the business would want to know:

• What did we expect we would spend?
• What do we typically spend on office supplies in a month?
• Are we growing or shrinking our spending on this expense over time?

Providing a profit & loss to the CEO that shows that we historically spend $1,000 - $1,500/mo on office supplies over the past year will be viewed very differently from one that shows we're averaging $3,000 - $5,000/mo, when the current month column shows that we spent $2,000 last period.

Providing all financial statements in the context of history significantly improves an understanding of the financial health of the business.  Extra gold stars if the company creates a financial "plan" (a budget or forecast), and then  provides a profit & loss statement that compares actual performance to plan on each line item.