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As a business leader, you want to realize your company's growth potential. Check out these three financial mistakes many companies make. By learning about these mistakes, our hope is that you will not only avoid them but also move to maximize your business success.
Running a business without a financial roadmap is kind of like planning a trip and leaving the GPS, map, and smartphone at home. There's a chance you'll reach your destination, but it's more likely that you'll use a significant amount of excess fuel doubling back and changing direction during the journey.
Developing a strategic plan will not only help you identify what your goals are for your company, but it will also involve identifying the steps you plan to take to achieve your business goals.
A strategic plan is an important first step toward success. Businesses should set up a sales forecast and an expense budget to help benchmark performance along the way.
Here's an example from our experience. A client was aware of many areas in which they needed to improve their business. They knew they needed to reduce their administrative costs, identify areas of strengths and weaknesses within their team, maximize their software to get more helpful information, improve their accounting practices to get more consistent and reliable numbers, and continue to increase sales by maximizing capacity.
With all these opportunities for improvement, knowing where to start was a bit overwhelming. They needed an actionable plan.
After a brainstorming session with our Delap Business Advisory team, this client had a tangible set of next steps to work toward achieving these goals. By breaking the high-level goals down into smaller, more manageable steps, the client was able to feel like they were finally making progress toward their goals.
Once you have a strategic plan in place, you need to be able to track your progress against that plan. Are you getting monthly financial reports on a regular basis? Are you receiving financial reports but do not understand where the numbers are coming from or what they mean for your business?
Solid and accurate financial reporting is the backbone to business decision making and the key to success over the long haul.
To create a reliable budget and track actual costs against that budget, it is important that trustworthy numbers are being used. Poor accounting practices and inaccurate data will inevitably hurt performance, and they could increase your company's susceptibility to fraud. Keeping accurate books to track performance is imperative to the long-term success of any business.
As part of ensuring the financial numbers are accurate and reliable, it is important to understand the various processes and controls that are occurring to create those financials. If there is an inconsistency in the processes or a lack of internal controls, the potential for errors or fraud increases significantly.
A client was not receiving regular monthly financial reports from their accounting team, and when reports were received, the numbers did not provide much insight into the actual health or performance of the business during the period. After our Delap Business Advisory team performed some walkthroughs with the accounting staff, certain process improvement recommendations were identified and implemented.
In addition, our team developed a month-end close checklist for the client to ensure that the numbers being presented were fully updated and reconciled at the end of each month.
Finally, a discussion with the client's management team resulted in identifying certain key performance indicators (KPIs) that truly helped management's understanding of the company's health and performance. A monthly dashboard was developed to help gather and quickly communicate the important information that management actually wanted to see on a monthly basis.
Once you have your budget developed and your business goals identified, do you have trouble sticking to your budget? When developing your budget, take a moment to consider the cost-benefit of each expenditure and its necessity to the operation of your business. Could that fixed asset acquisition or building upgrade be postponed until a more appropriate time? Should that excess cash be invested to earn a higher interest rate of return?
Remember to reevaluate the necessity of each expenditure throughout the year and as the economy, the industry, and your business operations change. By regularly reviewing expenses, your company may be able to "trim the fat" and eliminate those discretionary items that do not directly contribute to your business's bottom line.
A client was developing their budget for the upcoming year and had set a goal to hit a certain net margin. However, when putting the budget together, they realized that by utilizing similar estimates of expenses by category as in the prior year, the company would not be able to achieve their net margin goal.
After working with our Delap Business Advisory team, the client had a better understanding of which costs were directly impacting their total revenue earned versus the costs that were not directly earning revenue.
In addition, the client was able to better understand how the year-over-year increase in their direct costs was impacting their ability to meet their net margin goal.
By better understanding which costs were direct versus indirect, and understanding how the increase in direct costs was impacting their bottom line, the client was better able to make marketing and operational decisions to help their company be successful going forward.
Do any of these common financial mistakes that companies make ring a bell for you?
Do you need help developing a strategic plan or a budgeting method? Are you unsure about the consistency or strength of your company's internal controls? Do current staffing challenges mean your team just doesn't have the capacity to perform the necessary financial analysis?
Reach out to our experts on the Delap Business Advisory team for assistance. Our main objective is to make your business run more efficiently and to make your lives less complicated.
Delap is an award-winning, fully integrated financial services firm. Whether you are looking to increase profitability, streamline operations, or avoid these financial mistakes, our business advisors can walk alongside you to create a plan to take you there.