Historically, CFOs have relied upon traditional financial statements to guide their decision-making. Today, the prevalence of more sophisticated accounting systems and the demand for more information more quickly has given rise to the need for different kinds of reporting. Here’s a list of 5 tools that can help give you manage cash, identify areas for improvement, and plan for the future.
The Daily (or Weekly, depending upon how tight cash is) Cash Report gives a snapshot of the daily/weekly cash position as well as a forecast of expected cash inflows and outflows for the day/week. In a cash crunch, using this tool daily can be a lifesaver. Highlighting projected cash shortfalls can help focus efforts on collecting receivables or generating revenues. Once the cash crisis passes, preparing this report at least on a weekly basis can help the CFO determine if the cash balance is growing, or if it is being used elsewhere in the business.
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The Flash Report, or financial dashboard report, provides a periodic snapshot of key financial and operational data. This one-page report can be prepared on a daily, weekly, or bi-monthly basis, depending upon the availability of information and needs of management. It is divided into three sections: Liquidity, Productivity, and Profitability. The Liquidity section focuses on operating cash flows and the cash conversion cycle. The Productivity section lists key performance indicators (KPIs) to track changes in operating productivity. The Profitability section shows an estimate of profitability for the period. The key to using this report effectively is not to make it a mini-P&L, but to only capture and track that data that is useful in decision-making. Otherwise, it’s too cumbersome to prepare and gets put on the back burner.
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Most companies prepare an annual budget, but not all prepare projections. What’s the difference? A budget sets the company’s goals while a projection defines its expectations. Budgets are static and are often useless shortly after they are prepared. By contrast, projections are dynamic and adapt to changing conditions and expectations. Projections should be updated with actuals monthly and forecasted numbers (such as sales) should be changed going forward as better information is obtained. While many companies prepare projected income statements and possibly cash flow statements, few prepare a projected balance sheet. A projected balance sheet is a key tool used by lenders when deciding whether to invest in a company.
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A Fluctuation (flux) Analysis, also called common-size financial statements, looks at changes in the income statement or balance sheet expressed in dollars and as a percentage of sales or total assets. Prepared annually or as needed, this report looks at changes over a four- or five-year period and is useful to identify “slippage” or small changes in accounts over the course of years that might not show up when looked at as raw dollars only. For example, a 2% increase (as a percentage of sales) in COGS wages over a four year period may not seem like much. But in a $50 mm company, that’s a million dollars of slippage!
If you’ve ever put together a loan package, you’re probably familiar with Ratio Analysis. Bankers love this tool! They can use it to compare your company to others in your industry and market using established benchmarks. It’s also a useful tool for CFOs for the same purpose. Is your company as profitable as it should be? Sometimes it’s tough to know unless you’ve compared it to others in your industry. Looking at key financial ratios is also useful to track trends within the company year over year. If your banker is looking at it, shouldn’t you?