The Three Pillars of Financial Management in the Small Enterprise

Entrepreneurs have to pay attention to financial management to grow their companies successfully.  You have to make sure you make profits.  You have to develop confidence in others that you know your company’s finances.  You have to make sure you don’t run out of cash.  And you have to make sure that marketing and other activities are paying off, and that your operations are as efficient as possible.

Here are the three pillars of financial management to help you, the entrepreneur,  succeed:

1. Financial Analysis and Reporting

2. Detailed Cash Planning

3. Marketing  Analytics

If you get each of these right, you will do fine.

Financial Analysis and Reporting

This sounds pretty mundane – and besides, isn’t this what the accounting software is supposed to do?  Your accounting software does a good job of capturing transactions and spitting out reports, but it usually falls short in the analysis.  What you want is to develop a monthly reporting package that you can use internally, and can also share with lenders, investors, and board members.  At a minimum, this should package include these elements:

Brief Narrative of what happened in the latest reporting period

Key Performance Indicators

Income Statement

Balance Sheet

Cash Flow Statement

But not just for the latest month – it is important to show side by side recent time periods so you can see how things are changing at a glance.  Also, the monthly reporting package should show updated projections of where you think things are headed, not just what happened in the past.  Click on the image below to view a sample reporting package with everything except the narrative.

Sample Report Package

Sample Report Package

 

Detailed Cash Planning

Detailed cash planning is not something you need to do every week or even every month.  But when you find yourself operating with less than 20 or 30 days of cash, you need to sharpen you cash survival skills.  And if you are a practioner of “Just In Time Capital”, you need to make Detailed Cash Planning a core competency.

There is a great series of articles on detailed cash planning on the SurvivalWare website.  Here are just a few:

Just in time Capital – a survival technique for small business

How much cash do you have to work with?

10 Tips to Survive a Cash Crisis

Surviving a Cash Crisis using SurvivalWare Cash Planner

 

Marketing  Analytics

“Half the money I spend on advertising is wasted; the trouble is I don’t know which half”

This oft-repeated quote is attributed to John Wannamaker, the famous department store merchant who lived in the 19th and 20th centuries.

In today’s fast paced internet world, we no longer have that luxury.  Marketing analytics means different things to different people.  According to wikipedia, Analytics is the application of computer technology and statistics to solve problems in business and industry.  I am using Marketing Analytics in that context:  the application of computer technology and statistics to solve problems related to marketing.  Specifically,  to help the business owner develop an understanding of what works, what doesn’t, and how things are trending over time.

For web-based businesses, this requires a daily focus, and often data from 5 or 10 different sources.  They key is to gather the statistics in one place so that they can be analyzed and compared.  Also, to include both financial and non-financial measures – for example web visits, leads, unit sales, dollar sales, pay-per-click advertising costs, email open rates, etc. etc.  It is critical to be able to look at 7 day moving averages in addition to the daily numbers so that you don’t get whipsawed by the natural volatility that is the nature of the beast.  It is real nice to be able to aggregate the statistics into weeks and months as well to look at longer trends, or to create you own time periods to correspond with specific marketing campaigns or a website overhaul.  I’d love to hear how business owners are tracking their own marketing stats.  In future articles I’ll show you what we are doing for marketing analytics at Luhring SurvivalWare.

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2 Responses

  1. Great post – many businesses struggle making the link between profit and cash. A great KPI to make this link is Economic Value Added. We use this link to optimize inventory levels. Inventory impact both profit and cash – EVA is a perfect metric to balance these considerations.

    I agree with your points on cash planning – having inventory levels at a stable and optimum point can make planning easier.

    Finally on marketing analytics or any significant spend for that matter, ROI is a critical consideration. Once the money is gone, it is hard to get it back. Using tools from a proven ROI or the ability to use free trials first are important.

    Regards

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