The 3 Financial Levels of Success
Do you have consistent financials that you can review each month so that you understand your profitability and cash flow? If you don’t, then making decisions and prioritizing what is important gets very difficult.
Some businesses I have reviewed have been months or possibly years behind. Sometimes business owners are stuck in the mindset that they will get to the financials whenever a project is completed or a sale is made. Obviously, we need to generate revenue. But what if the product is priced wrong or you aren’t actually collecting on the work you have already completed? You could be working hard with absolutely no profit or even a loss. It is hard to understand how one can work but fail to bill properly, but it can happen quite easily without good accounting and finance.
There are 3 levels we need to consider based on the size of the entity, investors, and key goals.
- Basic Level – Businesses of all sizes should be doing basic level accounting and finance on a monthly or possibly weekly basis. A business cannot truly know their financials without staying current on the basic level activities. Even being behind one or two months is most likely causing additional work or poor decision making. You could be digging a hole and not know it.
- Moderate Level – Businesses that have investors and need audited financials should be performing moderate level financials. In this case, it is more important to close books each month in accordance to generally accepted accounting principles.
- Advanced Level – Larger entities that are publicly traded need even more sophisticated financials. Since they are publicly traded, financials are released on a quarterly basis and are scrutinized by investors.
Are you not even at the Basic level? Or maybe if you want to get funding from equity or debt, then maybe you need more moderate level financials (more on that next week).
Basic Level –
Below is a list of essential tasks that should be performed by the 15th of the following month. For example, if you want to see financial results from October, the following should be completed by November 15th.
- Enter all bank and credit card transactions and perform bank and credit card reconciliations.
- Review all customer invoices that have not been paid (Accounts Receivable Aging). Follow-up on unpaid invoices to get an update.
- Review bills that haven’t been paid and make necessary payments.
- Enter and pay all employee expense reports.
- Bill for all services and products.
- Process payroll and pay any health and retirement benefits.
- By the 15th of each month, have an up-to-date Income Statement and Balance Sheet of the previous month.
- Review the Income Statement compared to last month, year, and budget.
- Review all lines on the Balance Sheet and ensure reasonableness.
So what level are you at? If you don’t even do the basic activities above, you could have a great product or service but still not be cash positive. You might be able to make a few financial changes to be more successful. Start small and at least put yourself into a position of success.
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