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FINANCIAL ANALYSIS

Inc.com | Time for Your Financial Checkup

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With the New Year comes the perfect opportunity to get the financial side of your business in order. You need accurate numbers in order to make intelligent decisions. So sweep out the mistakes and clutter that have made their way into your financial statements and kick the New Year off right.

Here are five smart things you can do to put your financial house in order.

1. Clean Up the Balance Sheet
Have your accounting department (or accountant) prepare a thorough analysis of each account on your balance sheet. More often than not, there are some significant balances that need adjustment. It's very dangerous to be making business decisions about things like accounts receivable and inventory when the account balances you are looking at are wrong.

2. Benchmark Your Performance
Get with your industry associations and find out what kind of financial benchmarks and statistics they provide. One of the best ways to evaluate your financial performance is to compare your results against other companies in your industry. What if your gross profit percentage is 41%, but the average in the industry is 47%? This would be critical information that you may not be performing as well as you should, and it could be the wake up call you need to get your team focused on making your business more profitable. This is key to continuous improvement.

3. Create a Budget
A budget is critical to managing profitability. Without a budget you're flying blind each month. The process of creating the budget forces you and your team to really think about your business plan and what is most likely to happen next year. It helps you determine what has to happen in order to achieve your financial objectives. It creates accountability for yourself and your team.

You need to create your budget down to the detailed account level, so you can enter that budget in your accounting system. Then every month you can review your income statement with the budget numbers, by account, right next to the actuals. This will make your monthly review of the numbers fast and easy.

4. Create Monthly Cash Flow Projections
Cash flow projections are the secret to taking control of your business. Your budget projects specific revenue and expense categories and arrives at budgeted net income. But net income is only one component of your cash flow. You also have your collection of accounts receivable, purchase of inventory, debt service, capital expenditures, accounts payable, and other items that affect your cash flow also.

Your cash flow projections help you answer this critical cash flow question "What do I expect my cash balance to be over the next six months?" It also helps you answer questions like:

Can I buy the new equipment I need?
Can I make the balloon payment coming up on my loan?
Can I hire a manager to help run the business?
How fast can I pay off all my credit card debt?

(My December 2004 column provides a template and step-by-step instructions for formatting easy-to-understand cash flow projections.)

5. Make Accountability Important
It is very important that you hold everyone in your company accountable for financial results. Everyone should have very specific financial targets that you have agreed to each month. Then the secret is to sit down and review their actual performance against those targets every single month. You'll be amazed how fast you can improve your profitability when you hold people (including yourself) accountable for specific financial results.

Use this season to give your business a little holiday gift. Make a commitment to the financial health of your business, and it will page huge dividends for you all year long.

Last updated: Dec 1, 2005




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