The perpetrators of fraud often rationalize their choices by telling themselves, “No one pays attention to what I do anyway.”
experience I have found that whether you are a new business owner or an experienced CEO, it’s easy to overlook some basic controls in your organization to detect and prevent fraud. I’ve put together six practices you can…and should…implement if you have not done so already.
Read further at The CEO’s Guide to Fraud Prevention.
As new entrepreneurs become caught up in day-to-day survival it’s easy to overlook these four practices that support the long-term strategic growth of the new business:
- Annual budget
- Business plan with 5-year forecast
- Planning for leadership evolution
- Impact of decisions on cash flow
Let’s start with budgeting. The key to survival is measuring and monitoring the results. It is essential to complete an annual budget, break it down in monthly components and monitor each month. The budget should include an income statement, balance sheet and cash flow. Most companies have an income statement; however, I have seen fewer balance sheets and cash flow projections. This can really get you in trouble as you will not have any line of sight to your working capital needs. Working capital is the cash you need to run the business.
Grow in leaps and bounds when you incorporate these 4 strategies.
For example, if you sell goods, chances are you will need to spend money on inventory prior to selling the item and recognizing revenue. If you have projected your sales to increase by 25%, you may have painted a lovely picture of growth with your projected income statement that is not reality if you do not have the cash to purchase the inventory to sell because you have not projected the use of cash to purchase the inventory, which is what the balance sheet and cash flow projection are for. This can really get you into trouble, especially if you have inventory on your balance sheet, but not enough cash coming in from sales to pay for it.
In addition to a budget, your company should have a business plan and a five-year forecast. The business plan should articulate the plan for your company’s growth and address anticipated changes in the economy and future trends. It is difficult to predict all of these things, but if you develop a robust business plan, you are thinking through the different scenarios and how these scenarios will impact your business.
Think through leadership, including yourself, as your company grows. Clayton Christiansen* of Harvard Business School, says managers who are talented and skilled in the area of productivity and squeezing out the last bit of value from a company’s assets, are usually not the same people who are great at innovation and major change. Often a successful manager replaces the person who is responsible for helping the company become successful when the company becomes mature enough to establish systems and balance checks.
It is imperative to think through how decisions you make can impact cash flow – and here is why. I worked with an organization a few years ago that historically had double-digit growth each year and was very profitable. The initial product the business launched was a great success because it was much better than anything on the market. The company was getting ready to launch a second product. At my first management meeting they discussed how the product was on its way to the warehouse, noting they had offered extended payment terms to customers on their entire order if they added the new product to their order. No one had projected the impact this decision would have to their balance sheet and cash flow, so they were unaware that the plan they had in place was going to essentially stop incoming cash – and they had just signed up for a huge payable to the vendor. We had to react quickly and manage cash to meet payroll and other obligations. Such a decision caused a 5-6 month stressful time, requiring we run cash flow projections daily during that time to ensure obligations would be covered.
Unsure how to get started on these four critical processes to help with your growth? Contact Mindy Barker & Associates to find out how we can assist with the process.
* Clayton Christiansen is regarded as one of the world’s top experts on innovation and growth. He is the Kim B. Clark Professor of Business Administration at the Harvard Business School, where he teaches one of the most popular elective classes for second year students, Building and Sustaining a Successful Enterprise. – See more at: http://www.claytonchristensen.com/biography/#sthash.jS5zzfLx.dpuf
As a cost center owner, have you found yourself being asked to approve expenses, but you have no clue where they came from? You know you have a budget, but do you truly understand how it was developed or how you are supposed to work with it on a daily, monthly, quarterly and annual basis?
In the course of the budgeting process, an isolated group often prepares budgets in a vacuum, failing to include the right people in the process. This leads to confusion and frustration when the budget-to-actual expense is compared each month. I have often experienced meetings where budget-to-actual variances are discussed and the manager approving the actual expense (a) has no idea how the budget was prepared and (b) cannot answer any questions about the budget-to-actual variance for the month. This leads to the Board, President and Senior Leaders reviewing and approving a budget based on inaccurate information. They may have unrealistic expectations when planning for the next year as the expenses budgeted in each cost center is inaccurate. Make sure your budget process is well planned out and includes all the responsible parties.
Please contact me if you would like to have your budget process reviewed to learn how to include all of the right contributors, avoid setting unrealistic expectations and finding surprise variances each month.
Cars built in the early 2000s that had a built-n GPS required periodic updates using a CD with new roads and street addresses. If you are still driving around with a GPS of that era, you already know that when you get to a new construction area, the GPS will confuse you more than help you get to your destination. This analogy is similar to preparing an annual income statement for a budget without updated information. The annual income statement will show the projected revenue and expenses – but will leave out critical pieces of information vital to the day-to-day planning of a business. Here’s an example of what I mean: revenue is highly seasonal but expenses are spread throughout the year, causing issues with covering expenses month to month. Actual cash flow and the ability to cover debt service payments are not analyzed solely with an income statement. Another example: internally developed software can cost a lot of money; the cash required for the development is maintained on the Balance Sheet and not the Income Statement.
Lack of proper planning and analysis, and failure to prepare a projected-by-month Income Statement, Balance Sheet and Cash Flow can lead to an unplanned cash crisis. Please contact Mindy Barker & Associates if you would like to have your budget process reviewed to determine how you can avoid such crises each month.