How to Use Financial Intelligence to Lead Your Business

Many business owners get their financial reports from their accountant, look them over, and that’s pretty much it. They’re able to check in on the current status of their business and have a general idea of how it’s performing.

If this is your current practice, you’re leaving a lot of valuable insights and information out of your decision making. The truth is, a lot of business owners need help gathering the right information, running the right reports, and interpreting that data to take informed action.

Many of the business owners we have worked with have expressed shame in not being more financially literate. We want you to know this is very normal and common. If you’ve built your organization based on your strengths to think about the big picture and envision how to get there, it makes sense that diving into the details might not be something you look forward to or are proficient in.

Looking Backward

At its most basic, Financial Intelligence is about two practices: looking backward so you can see how you got to where you are and looking forward to predict where you will go.

When you’re looking backward two of the most important reports are your balance sheet and your Profit and Loss statement (P&L), which is also called an income statement. The balance sheet is a status update on your financials at a point in time. The P&L reports activity over a period of time. For example, if you update and report on your finances monthly, you’ll see a picture of what happened in the current month and what has happened up to this point in the year. Some update quarterly and some just an annual statement.

Looking Forward

When you’re looking forward, you use budgets, forecasts, and cash flow projections. Here’s a quick breakdown of how each of these forward-looking reports can help you gain predictability and flexibility in your financial intelligence:

• P&L Budget – Plan your month-by-month revenue, expense, and resulting profits by applying assumptions to your historical P&L. Give it your best estimates and then track your actual results against your budget. If you have a strategic plan, your assumptions should be connected to that plan.
• P&L Forecast – As each month goes by, you have better information than you had when you created your budget. Don’t adjust your budget. Instead, use your actual results and any updated assumptions, to forecast where your P&L will end up by the end of the year. If you’re new to the forecast, consider updating it quarterly first, rather than each month.
• Cash Flow Projection – A basic principle of accounting is to match related revenues and expenses in the same period to properly reflect profitability in your P&L. This is often different than timing of the cash flowing in or out of your business. Use a weekly cash flow projection to estimate your cash receipts, disbursements, and weekly cash balance. This will give you visibility on when cash could get tight, while you still have time to do something about it (e.g., accelerate collections, defer payments, prepare to inject capital or loan proceeds, etc.).

Get on Track

It’s never too late to get your financial reporting on track. And there is no shame in needing help. You can download and use our complimentary budget and/or cash flow templates. Keeping your financials up to date and knowing how to use your reporting doesn’t have to be complicated when you have the right team around you. If you want more support, we offer Virtual CFO and audit services, which you can check out here.