Forecasting, budgeting, cash flow analysis, key performance indicators are all terms used by CFOs, but what do they truly mean and how can a company develop a strategic financial plan to effectively use these tools? Well, it starts with just that, a plan. When developing a strategic financial plan for a company it’s important to consider, but not limit yourself to, the following questions:
- What are the goals of ownership? Do they want to sell the company in 3-5 years or hold and operate for 20 years?
- What are the key metrics that drive profitability to the business?
- What are the key metrics that drive value to the business?
- Do they understand the profit margins of the business in total and by revenue stream?
- What is the cash conversion cycle of the business? (How long it takes for cash outflows to turn into cash inflows, i.e. cash paid for product to cash received from sale of product.)
Based on the strategic direction of the company, an annual budget should be created. When creating a budget, it is important to not just focus on the income statement, but also the flow of activity driving the balance sheet, and then ultimately the timing and flows of cash.
For many of our clients, in addition to the budget, which is static and does not change once produced, we use a rolling forecast model, which is updated monthly based on the most recent company information available. This allows us to have clear visibility into our clients’ cash position for a minimum of 90 days in advance at all times, thus allowing for appropriate cash and business planning to be made proactively in advance.
Key Performance Indicators (KPIs) can then be developed to focus on driving profitability, value, or both to the company. Examples of KPIs may include tracking the average days outstanding in Accounts Receivable in which continued improvement over time will increase cash flows of the business. Another simple KPI to track would be gross margin by product or service line. By knowing this information, management of the company can make decisions to improve these metrics over time.
KPIs should be included as part of an ongoing scorecard and reporting package (monthly at a minimum) that management reviews. It is crucial that management develops KPIs that can be translated into actionable insight and ultimately to action. An action plan should be established at each meeting based on the movement in the KPIs, continuously focused on improving the KPIs over time. The action items should then be reviewed at the following meeting for progress at which time new action items are then created.
In short, know your goals, develop a plan, budget, and forecast out your plan, develop trackable metrics, and then execute on your plan.
We Can Help
Contact us to see how Signature Analytics can assist in identifying your goals, developing a plan, and developing metrics to execute your plan. Our talented, experienced accountants and financial analysts can complement your existing accounting employees, or act as your entire accounting department (CFO to staff accountant). We provide the ongoing accounting support and financial analysis necessary to more effectively run your company, analyze operations, and guide business decisions to help you grow.