The Five Cardinal Rules of Financial Controls
Turnaround specialist Raleigh Minor of Allomet Partners, in Savannah, Ga., is convinced that the failure to set up timely and relevant financial controls gets more growing companies into trouble than any other financial mistake does. Here, Minor's five rules for setting up financial controls:
1. Generate numbers quickly and accurately. For numbers to be relevant, Minor believes that growing businesses need to compile them no more than 10 working days after each month closes.
2. Establish different timetables for different numbers. All companies have to establish priorities about which numbers to monitor monthly and which to watch weekly. One example: you must pay close attention weekly to inventory accounting and actual numbers, but you should also make calculations and test their accuracy monthly. Growing companies should also track sales and receivables weekly.
3. Compare results with projections. "To make actual numbers really useful," says Minor, "you've got to know what expectations the company had and how those compare with actual results." Any number of forecasting strategies can mesh well with a financial-reporting system. Minor recommends that companies project for a six-week horizon and then set new projections at the four-week point.
4. Prioritize. Minor suggests developing a "Weekly Condition Report" that covers accounts-receivable information, including beginning balances, cash receipts, and credits; cash-position updates; recent sales; accounts-payable activities and outstanding obligations; order backlogs; detailed breakdowns of all cash disbursements; and current employment figures, including a sales-per-employee ratio. He recommends reporting those numbers in two columns, one showing management's most recent projections, and the other representing current realities.
5. Circulate financial reports to responsible managers. Although circulation lists will differ by company, Minor recommends that weekly and monthly updates be sent to the CEO, sales manager, controller or chief financial officer, and the operations or manufacturing manager, as well as other key personnel. -- Jill Andresky Fraser
A Schedule for Tracking Key Results
Which numbers -- and financial trends -- should management be tracking, and how frequently? Raleigh Minor recommends the following blueprint:
Monthly updates on --
* inventory (including accounting or physical tests of accuracy);
* accounts-receivable "average days outstanding";
* accounts-payable obligations, complete with an aging breakdown.
Weekly updates on --
* current cash position, as well as details about how much was received, when, and from whom;
* cash disbursements, broken down into as many specifics as possible -- payroll, materials, purchasing, insurance, and so on;
* new sales;
* accounts receivable -- breakdowns for beginning balances, outstanding credit, and cash receivables;
* accounts-payable payments;
* order backlog;
* number of employees, supplemented by various productivity calculations such as a sales-per-employee ratio.
-- Jill Andresky Fraser.* * *