I know most of you run your companies on a cash basis. Your gross is small enough that the IRS does not require you to run accrued financials, which are more difficult to maintain. But, it would behoove most firms to check their positions using accrued financials every once in a while.
This is especially true with service firms that have employees. Because people come and go, clients come and go, you may be processing payments for work done last quarter – or older. And, that means, if you were really busy last quarter and slower this quarter, you won’t necessarily see that your cash sources are drying up.
(We run both accounting systems routinely; check out the table below to see how different they look. As you can see, our two biggest clients were late sending in their checks and we had employees submit their expense reports late, due to the holidays in December; we still paid their costs immediately.)
In addition to this look at your financials, it’s best to watch your KPI (key performance indicators). In our case, we track our billing hours, our work backlog, the average client revenue (total, large, and small clients), and the mix of clients (corporate v. partnerships and trusts, domestic v. worldwide, market sectors for our clients).
We also watch the trends in each of these KPI. This can give us early warning signals. The single point in time benchmarks (checked weekly) are one thing- but we also use four week rolling averages and year –to-year comparisons, to insure we are kept aware of how our company is doing.
Checking your current financials only tells you how healthy you are right now. It won’t be able to tell if you are growing or contracting, if your business mix is changing, and how healthy you will be in a few months. That’s why we suggest you check these alternative views. To keep (financially) healthy!
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Interesting, I have not looked at a financial sheet like that since I retired. This is the first year I have income being paid in one year for items sold in another year, so I will need to adjust my book keeping. Thanks for reminding me.
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Glad to oblige, Chef William. I do hope that you examine your business income on a routine basis- whether via a spreadsheet or more formal processes, to insure you know where it is and how it’s doing…OFTEN.
Thanks for the visit…
My business is very small and I do cash accounting for tax return purposes. BUT… I keep a spreadsheet projecting out the next 6 weeks (each column is one week) to keep a handle on cash flow. For my scale operation that works well. (not that the cash flow is always working well, lol)
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That’s a good process, Alessa. But, it’s only as good as your prognostications. I hope you compare your prognosis to what you actually accomplish over those six weeks- and compare it to the previous six weeks.