Do you know how a good CFO helps run a business?
I often have clients approach me, asking for outsourced CFO services.
CFO services are difficult to identify with a simple explanation because a good CFO takes on so many critical roles.
However, there are a few things a CFO can specifically offer a small business.
Here are some guidelines on how to run a small business like a CFO.
Create Budgets
Building a budget for your small business every year is important.
Ideally, you would build your budget towards the end of each year. You want to use your historical financial performance as a guide.
Be sure to use your past performance only as a guide, and that is all. What I mean by that is that a good budget must incorporate logic and your goals.
Blend logic based on your historical financial performance and what you want to happen. Apply this method to your income and expenses to create the best budget possible.
The last step is to enter your budget into QuickBooks by month, which means each month is separate. Once your budget is entered in QuickBooks, you should not change it, and you should run budget vs. actual reports often. This will allow you to keep your budget on track with your goals.
Create a Forecast
When you initially build your forecast before the start of a new year, it should be identical to your budget.
You may then ask what the difference between a budget and a forecast is. The answer is that a budget does not change throughout the year, but a forecast does.
Each month, you should redo your forecast based on your variance, which is essentially your budget vs. actual.
You should look at your actual performance versus your expectations and use that information to help you modify your forecast for the future.
You also want to consider any business changes that have occurred. If you intend to hire an employee within the next two months, then that should be accounted for in your forecast. This approach is referred to as a rolling forecast.
You can assess your business financials by examining your actual performance, comparing it to your expectations, and using that information to modify your future forecast.
This allows you to really control the finances of your small business and spot any potential issues or opportunities. By re-forecasting, you will literally be looking forward in your business.
Look Forward, not Backwards
It is really important to look forward, not just backward, in your business.
When doing financial reporting most business owners tend to look at a profit and loss from last month or last quarter. Looking at the past is often too late to react and fix potential problems.
While looking backward at your financials is important, it is much more important to look forward in the business. That does not mean just looking at what you have budgeted.
When you look forward, you should use your performance to predict the future. Then, modify your forecast (rolling forecast or re-forecast) and analyze those results.
Does anything concern you? Is there anything you can do right now to modify the future expectations that you are predicting?
If you follow this logic, you can understand why re-forecasting is important and how it can benefit your business.
The next time you analyze past financials, remember that it is more important to use them to look into the future.
Do you run your business like a CFO? Do you want to?
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