The #1 Error in Business Finance

As we reach the midway point of the year, it’s a prime time to pause and look at the performance of your business so far—to see if you’re on track to meet annual goals, or if you need to make adjustments.

But if right now is only the first, second or third time you’re doing financial analysis on company performance this year, you’re one of countless organizations making the number one error in business finance: failure to consistently analyze the numbers.

When we asked our partners for their go-to financial advice they give their clients most often, “Regular monitoring of financials” was, by far, the most common answer we received. Read all their answers below, including a few bonus tips to consider at the end.

Not Regularly Monitoring Financials

One of the most common issues I've noticed with many business owners, particularly those running smaller operations, is that they don't regularly and meticulously monitor their financials. This oversight often stems from the need to focus on the daily grind of business operations, leaving little room for a detailed examination of the financial side of things. However, this lack of financial scrutiny can lead to missed growth opportunities, unnoticed monetary leaks, and could potentially snowball into serious financial difficulties over time.

Remember, you can't effectively manage what you aren't measuring. The heartbeat of your business's success pulses through its financial health, making it crucial to regularly monitor and manage your financials. This is my go-to advice - making your business's financial health a priority is a game-changer.

—  Tito Caceres, Bloom Partners Talent Solutions

The number one problem is not having accurate and timely accounting reports available month to month. Too many companies fall behind on this, putting them in a tough position if an important decision needs to be made in the business. Delays in accessing accounting reports can lead to missed opportunities, incorrect assumptions, or even poor allocation of resources, which can have detrimental effects on the company's competitiveness and long-term success.

Accurate accounting reports serve as the foundation for assessing the company's performance, evaluating profitability, and managing cash flow effectively. These reports provide a comprehensive view of the company's revenue, expenses, assets, and liabilities, allowing management to track financial trends, identify potential risks, and make data-driven decisions.

— Carla Policastro, Cycle CPA

The number one problem is taking too long to realize that you have a problem. You have to look at your key numbers every month, at the very least! View these numbers the same way your doctor views your critical health numbers. Assign each one an "OK" range. If any number slips out of that range, it bears watching. Two months in a row probably indicates a trend. There's your wake up call. Do something about that trend before it becomes a PROBLEM!

— David Fellman, David Fellman and Associates

Don't avoid them! Owners have to get accurate financials by the fifteenth of the following month. (We have a way they can analyze them in less than 10 minutes.) Then they can make good business decisions based on accurate financial data and spot minor issues before they become major crises.

— Ruth King, Business Ventures Corporation

My best advice is to look at leading indicators on a daily basis so that corrections may be made on an on-going basis before it's too late. If you're only looking at last month's income statement, it's too late.

— Phil Harwood, GrowTheBench.com & Snowfighters Institute

Owners many times fail to understand the difference between invoiced sales and cash flow, which can lead to unanticipated concerns about not having sufficient cash on hand to pay the bills, even though invoicing may be right on track. Charting cash flows for several months, or even a year, in advance on a weekly basis as a part of regular financial management allows ample warning for periods when there may be insufficient cash to cover payroll and other expenses. This also allows for arrangements to be made which ensure sufficient cash is obtained for those low-cash periods through a line of credit, additional capital from ownership, or other sources of cash.

— Steve Steele, Bruce Wilson & Company

In my experience, the number one missed opportunity is evaluating completed tasks and jobs. When utilizing a robust job costing business management software, there is a process to managing your financials and it all starts with a budget. Once we know the costs to operate the business, we can set our target gross margins for estimation. This is only part of the process. Evaluating job costing is critical to ensure jobs are being estimated and produced in a profitable manner. Best case is to have the estimator and production manager evaluate results to determine if production rates need adjusted or better management of production in the field is needed. Often times, it is some of both.

— David Arnold, 212 Advisors

Business owners and leaders are waiting to get financial reports 10-20 days into the next month and aren't monitoring key drivers weekly. My most important piece of advice is make sure you leverage weekly data in a highly visible way across all departments.

— Cullen Talley, Exit Momentum

Certainly, having a sound budget in place to start the year is important. Once the budget is in place, you want to monitor progress towards meeting monthly budgeted goals by producing accurate profit/loss statements at the end of each month. More important though is to produce weekly job cost reports. A monthly P&L is a look in the rear-view mirror. It is history that you cannot change. Job cost reports tell you how your jobs are performing against the estimate and contract you produced. If you are not hitting gross margin goals for the job, you still have the ability to make in-course adjustments to the job.

— Jud Griggs, The Harvest Group

Other Things to Consider

Unrealistic Pipeline Management

As a long-time salesperson, my first thought around business financials is always the funnel. What's next? What orders are coming next quarter? And how realistic is that pipeline? Where I see companies run into issues is when they are overly optimistic or not honest with themselves when it comes to having "committed" customers in the pipeline. Or, their salespeople lack funnel discipline. Either way, these aren't forecasts—they're hopes, and hope is not a strategy.

— Chris Luecke, Manufacturing Happy Hour

Cash Flow Management

Find ways to collect as much cash up front as possible. Create a payment schedule on a signed contract and stick to it. Consider offering project financing company like Hearth or HFS financial, where you get paid upfront and your client pays installment payments.

— Jeremy Huffman, Constant Flow Marketing

Monitoring cash flow in real-time is essential to ensure you have enough cash to meet short term requirements. Additionally, consistent management of expenses can result in a reduction of unnecessary costs, so negotiate often. A budget is essential to track both expenses and revenue. This is a dynamic process and requires adjustment throughout the year.

— John Paganini, CrewTracker Software

Too many companies concentrate on increasing revenue at all costs without a solid strategy in regard to revenue management. The concept of revenue management involves increasing contribution margin with various tools like pricing strategies and labor management. In other words, a larger revenue may not necessarily mean a larger gross margin.

— Bill Walker, Walker Manufacturing Consultant

Incorrect Pricing

Correctly pricing your product or service in today’s economic climate is the most overlooked financial lever in your business. If you consider that an average blue collar business has a net margin of 20-40%, a $1 hourly charge adjustment (i.e., $20/hr to $21/hr) is only a 5% price increase but that boost drops directly to your bottom line and increases profits by a whopping 12.5% to 25%!

— Pete Morelli, Holden Advisors

Never Be Satisfied & Always Seek Improvement

A common problem for many leaders is they typically do not ask many questions when financial results meet or exceed expectations. They are satisfied with the result. To avoid unexpected disasters, my financial advice for leaders is to focus on regularly challenging your team with great questions designed to take action for constantly improving results. Leaders who are proactive in thinking about how the business could achieve better financial results are typically more successful than leaders who tend to be more reactive. Here are a couple of questions to consider:

• If we had the chance to do the month over, what is one thing we could have done differently / more of / less of / sooner, etc. to have achieved a better financial result?
• What is the one thing we are doing (or not doing) today that could negatively impact our financial results three months from now?

— Randy Goruk, LeadersEdge360.com

Share Financial Data with Managers (and Hold Them Accountable to It!)

Owners need to share some (not all) financial information with their key managers in order to help educate them on how company profitability works and the true cost of doing business. Managers do not understand how the company makes money and how their individual decisions & actions positively or negatively impact profitability. In many privately held businesses, ownership does not share their financial information because they "don't want their managers to know how much money they make." While this is understandable, those same owners by default are the only ones who are accountable to the financial performance of the company and complain about their managers who are making unwise financial decisions.

Many companies that don't want to share the total financials create abbreviated P&Ls for their managers that show all the direct and controllable costs for their departments. That way, managers can start making decisions with their eyes open and understand the direct impact to company financials. Once you do this, you can start tying your managers to their controllable expenses & profitability generators, which will ultimately lead to everyone thinking more like an owner and making decisions that will be financially beneficial to the company.

— Wes Verno, Verno Consulting

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Want more financial advice from our partners? Check out this post if you've been losing a lot of contracts →