How to keep your business on track with annual financial checkups

The market and the businesses operating in it are in a state of constant flux. Keeping up with these changes requires forecasts and budgets. But these aren’t static documents. When used correctly, financial forecasts offer business owners a chance to gauge company performance and determine what strategic actions are needed to adjust to the way market realities are affecting their profitability.

“It’s a good excuse to re-evaluate the direction of the company within the context of expanding or contracting opportunities,” says Michael Stevenson, CPA, CFE, CFF, ABV, managing partner at Clarus Partners.

Smart Business spoke with Stevenson about the role of annual financial checkups and how to conduct them to stay on top of market realities and company goals.

What should be reviewed during an annual financial checkup?

The critical information to review during an annual financial checkup is all that pertains to where the company is at today and its goals for the future. That information should include financial, operating and revenue numbers for the past 12 to 18 months to start the conversation. From that conversation, future goals and the plan to achieve them can be set.

During the checkup, review the current head count, gross margins and all other balance sheet items. Look at receivables and payables to ensure the time between each is equal — receivables that are 90 days out and payables that are 30 days out can create problematic cash gaps.

As a company looks to grow or contract with the market, it needs to determine the proper head count to meet its goals and stay within budget. If top line isn’t growing, losses must be minimized. Typically that means selling equipment, cutting back on discretionary expenses or downsizing the employee count. Based on the direction a company is headed it must execute adjustments based on the realities of the situation.

Given all the data and possible paths, companies can face analysis paralysis and struggle to make a decision. But it’s important that once issues are identified in a financial checkup, the company acts.

When during the year should an annual financial checkup be conducted?

Whenever there’s a significant change in the business, a financial checkup is recommended. A very large account may come through the door that requires greater resources than are on hand to service the account, otherwise the company risks losing the client. This is a good time to check on what must be done to service the account to maximize its profit potential.

Absent a big event, financial checkups are best done during the fourth quarter. As year-end approaches it’s a natural time to start thinking about the plan for the coming year.

Who should be involved in an annual financial checkup?

The owner and executive team, whoever that encompasses, should be part of the process. What typically comes out of an annual financial checkup is the direction the company will be headed. It’s important that those involved leave the financial checkup on the same page so that a unified message can be communicated down through the ranks.

Why might business owners avoid annual financial checkups?

The most common excuse is not having enough time. Business owners often become consumed with the process of running their business, getting so immersed in managing day-to-day operations that they think they don’t have time to take a breath and find out what their business is doing.

Some business owners don’t want to face reality. They figure whatever problems might arise they’ll fix it by working harder to generate more revenue. Unfortunately, that doesn’t always work.

Businesses and the economy are and will always be changing. Business owners must recognize the importance of taking a break to get the big-picture view of their company. Those who just put their head down and keep plugging away are hurting their ability to manage effectively. Take the time to complete a financial checkup at least annually to take inventory and re-evaluate goals moving forward.

Insights Accounting is brought to you by Clarus Partners