You went to the trouble to create your financial projections – if you didn’t, you certainly should! In fact, here is some great advice and a couple of templates you can use to develop the projections that will really reflect your ideas about what is the likely outcome if your plans all work out. You know that you have to maintain accounting records and are probably using QuickBooks or some other system suitable to your business type and scale. So you have great financial reports – but what do you do with them? Most small business leaders get their end of month accounting reports and “study” them – but what are they trying to learn? At the very least, you want to make sure that you are making money. Are you making money? Is it enough? Are your expenses under control? How are your sales going?
Do you really have a clue?
Here is the answer. You need to create a “Knowledge Management System” – a sophisticated name for a comprehensive control system that is built on the two parts that you have already created – your forecast and your financial statements.
The first step is to perform a “Budget Deviation Analysis.” Here, you simply compare information from your accounting statements with the forecast. In this month, you forecast $X for sales. Compare the actual sales with the forecast amount. Is it more? Less? If it is different, why? Even if the amount is greater, it is important to know why so that you can do more of whatever is creating the increase. If it is less, you certainly want to know why – and as soon as possible so that you can either bring the sales up to the projections, or revisit the financial forecast.
The same is true for each of the expense categories. Here it is important to look at both the actual numbers and the numbers as a percent of sales. This makes the expenses more comparable if the actual sales are fluctuating (deviating) from the forecast. As with the sales, where expenses are different from those forecast (expected), investigate to learn the reason why as quickly as possible. If an expense is greater than expected, bring it back under control, or revisit the forecast to determine its longer impact on your profitability.
Now, on to the “Dashboard.” A business dashboard is a great name for a simplifying approach to looking at the outcome of the financial analysis. What it really does, is perform the budget deviation part of the financial analysis automatically, and then only reports on the areas where actual performance is different from (deviates from) the forecast. Thus, your “dashboard” is making the use of your time much more efficient as you now only need to look at the areas that are different from what was expected.
Setting up a rational forecast and a budget deviation process resulting in creating your Business Dashboard can benefit significantly from outside professional advice. Having access to a financial professional to perform these Chief Financial Officer (CFO) is usually way outside the realm of what a small business can afford. Utilizing these services on a part-time or as-needed basis is not only affordable, it is smart. This is where an organization like The CFO Connection can provide the professional advice and direction critical to managing the success for any dynamic organization.