Automating your software to serve up digestible financial information
The main reason to automate your financials is to keep them top-of-mind. If they’re not served up to you, chances are you’re not going to look at them. And if you wait a month to look at things such as Accounts Receivable, aka A/R or who owes you, you may not realize that people have been slow-paying and you’re owed a TON of money. At the bare minimum, I advise clients to have their A/R automatically sent to them by their accounting software on a regular basis. I like weekly.
If you didn’t already know you can set your software to push you reports at regular intervals, you didn’t read my previous blog post, “Make QuickBooks your B!$%^.” Either way, now you know!
Automation is just the first step
The reason I like clients to see their financials weekly is because it forces them to think about them regularly, and the more familiar they get with looking at their numbers, the more innate their thought processes are going to be. If you’re only looking at your receivables every few months, well, then you’re working for free for any client who hasn’t been paying their bills. If you had been looking at your receivables every week, you could have halted any additional [free] work until you got paid. If you pay sub-contractors, you’re losing even more! And there’s another hidden cost: the opportunity cost of working for other clients that DO pay.
Of course, automation is only step one. You need to understand what’s being sent to you, and if you don’t, you should hire someone to help you (HINT HINT: it’s me!)
Red flags are your friends
Let’s assume you are reading that e-mail and you do understand what it’s saying. And let’s say you’re doing $100,000 worth of billings every month (GO YOU!), so we would expect your receivables to be around $100k. If we see that number at $110k, we might not be alarmed — perhaps we had a bigger billing month — but then the following month it’s $125k, then it’s $200k, well then… we’re seeing a pattern, and it’s not a good one. Now, if you’re not familiar enough with your numbers to know that $100k is the right number, then when you see a report for $200k, it’s not going to set off any alarms. But if you know it should be $100k, and you watch it creep from $110k to $125k to $200k, it will set off a red flag, because you have internalized the fact that $100k is correct number. This is what allows you to take appropriate and timely action. Red flags are your friends because they protect you. And you only see red flags if you’re consistently reviewing your financials.
It’s the same thing on the payables side. We want to be thoughtful about keeping vendors happy. We want to make sure we’re paying staff, consultants — the people who are helping us do our work. If you know, every month, you’ve got about $50,000 worth of bills, but suddenly you’re seeing $75k, and then it’s $100k, you know you have not been paying people or someone’s fees have gone up or you’ve been double billed! Whatever the reason, it’s a red flag! You may be getting notes saying, “Hey …um … where’s my money” but if you were regularly reviewing the Accounts Payable aka A/P or who you owe, this won’t happen.
Benchmarks and gut-checks
You don’t have to know every detail of your financials at all times. You just need benchmarks and red flags. Having that reporting served up to you on a regular basis allows you to quickly gut-check those benchmarks and recognize red-flags without having to hunt for the information. If you’re reviewing your financial information on a regular basis, you will start to see patterns and be able to act more quickly.
The most common accounting systems for small and medium-size businesses have automated reporting functions. Again, automating your reports is the key FIRST STEP. That doesn’t make your financial health better. Sorry. And thank goodness for that, or I’d be out of a job. You have to understand what you’re looking at and for.
Automating payments: yay or nay?
One caution: While everything can be automated, not everything should be automated. If you have cash-flow issues, for example, then you may not want to automate payments. Automated payments are great for things such as mortgages, where you don’t want to have to think about it, and it’s the same amount every month, or where missing a payment can cause issues such as damaging your credit or causing services to be cut off. You want to make sure it’s paid — but it only works if you have the money to pay it.
Also beware of variable payment amounts. It’s great to set up automated payments for a vendor who gets the same amount every single month. But if you’re working with a vendor that’s $100 this month and $10,000 next month, automated payments can be an issue.
On the flip side, if you can automate getting paid, then do! It eases the burdens of cash flow management and collections. Consider ACH payments or having clients sign up with a credit card. Yes, that may cost you some percentage of your fee, but 95% percent of your fee is better than 0%. There are also ways to have your customer pay the fees when they pay via credit card.
If you need help automating your financials or need someone to go hunting for red flags on your behalf, I’ve got your back.