Follow the Leaders
For 30 years, Scott Warren, Co-Founder, Owner and Director of Warren Whitney, has been working closely with CEOs. Acting as their fractional CFO, he works with clients requiring senior level business financial management or systems expertise. We recently talked with Scott Warren about:
Here’s what he had to say.
Step 1. Make sure you have good and timely input. The data needs to be submitted timely and accurately coded. The organization should have in place documented policies and procedures to ensure the data input is done correctly.
Step 2. Incorporate checks and balances into your practice. You need to reconcile your subsidiary accounts (such as accounts receivable, accounts payable, and cash) to the general ledger number. Make sure your details equal your totals. Those are the first steps to making sure that you have accurate and timely monthly financials.
First, set-up internal controls. Make sure your assets are protected. Unfortunately, the move to electronic systems has not reduced the opportunity for fraud; if anything, it has increased. Your internal controls, including separation of duties and oversight are important to the accuracy of your reporting.
Next, understand your key drivers. Think about the important components in your business or industry. Examples of key drivers are bank treasury management tools, payroll, and inventory turns. The drivers vary depending on the individual company and industry – understanding what they are has a strong impact on the balance sheet. Other key drivers may be chargeable hours, revenue per employee, sales per square foot; I could go on another hundred measures.
Then, evaluate the risks your business and industry life cycle face. Is it competition? Is it price influences? Is it a new tax law? How would a potential hurricane affect your business? What is the effect of a major system failure or breach? What should you be considering based on your position in your company’s life cycle? Delineate a list of your risks and understand the true effects they might have. Then, combine that with an evaluation of the probability of those risks. That allows you to look at the potential downfalls and impact on your business. A risk analysis allows you to reduce the impact and measure success against those risks in the future. You will also want to relate the potential impact to individual line items on the income statement, balance sheet, and understand the effect it can have on the overall financial health of your business.
The surprising mistake I see again and again is the number of owners who never look at their balance sheet. There is so much information you can gain especially when you review the balance sheet in combination with your sources and uses of funds and cash flow statement. That is how you get better insight into what your balance sheet means to you.
Knowing your assets, and reviewing your balance sheet from one period to the next, is the key to truly seeing how your cash flow is affected by the balance sheet items such as receivables, inventory or payables as well as the debt obligations. In addition, the common ratios (like debt to equity) from your balance sheet, let you know your overall financial health.
Pay attention to cash flow, cash flow, and cash flow. When you are in growth mode, your business is going to be cash constrained. We talked about key drivers earlier. You need to understand the effect these drivers have on your cash flow. It is critical to evaluate how you are performing against your budget and your strategic plan. When all of this comes together, it allows a growing business to manage expectations and make smart business choices. This is the work we are passionate about; helping our clients grow to the next level to make potential happen.
About Scott Warren
Scott Warren is a co-founder and director of Warren Whitney and a senior member of the management teams for several of the firm’s largest clients. Working primarily with clients requiring senior level business financial management, or systems expertise, he brings more than 20 years of experience in helping organizations manage change. Learn more about Scott.
Warren Whitney is a trusted Sponsor of VA Council of CEOs.