Liquidity Management: Why Is It Important?

Efficient liquidity management ensures you have adequate cash to cover your expenses. When practiced effectively, it can help a business manage its finances such that all expenses are covered by the available cash reserves. Liquidity management is necessary to allow businesses to function smoothly, including discharging financial responsibilities in a timely manner.

In the absence of a sound liquidity management program, the business may operate within what could be a false sense of financial security. Cash balances may appear inflated, leading to situations where financial resources are actually depleted without it being apparent. In case of reduced cash stores, businesses may continue to operate in the knowledge that they have adequate money, until an unexpected emergency or requirement surfaces.

Cash emergencies can take up different forms; right from loss of revenue in the form of a key client or a good investment opportunity for the business, or simply an unseen expense. Without liquidity management, it is easy to slip into a state of unawareness. However, this can spell bad news for the business. Payments not honored or checks that bounce can create a negative image for the business; they can also shake up investor trust.

Poor management of cash or liquidity can also hamper operations. Salaries can get impacted, plans for growth and expansion may face suspension and the business may lose out on good opportunities. The other important aspect of sound liquidity management is to ensure that there is a cash reserve for the business at all times. Usually, everyday income does not match up to the expenses incurred by the business. For this reason, cash flow needs to be managed carefully to ensure that expenses do not exceed cash reserves.

Four Business Functions To Automate

Four Business Functions to Automate
Most small to mid-sized businesses operate under restricted budgets and must optimize existing resources to remain within budget, while ensuring that client services and client expectations are met. 

Automation can assist small businesses in optimizing existing resources. Identifying key areas to automate can produce significant increase in productivity. Below are four business functions worth considering for automation. 

Bookkeeping is the foundation for accounting. When a company automates bookkeeping functions, record keeping is completed in a timely and accurate manner. 

Accounting functions are the backbone of every business, including start-ups. Accounting requires maximum attention to details. A minor error that occurs when recording financial transactions can result in under or over reporting of profits, or worse--significant tax implications. For many small businesses, the owners are responsible for the accounting and also providing the services to clients. Business owners can perform a finite number of tasks and do them well. They can either work diligently to ensure client services are met, thereby neglecting the accounting tasks, or they can pull resources from client services to concentrate on the financials. Automating the accounting function can assist in ensuring both objectives are met. 

IT Processes: Small businesses depend on IT for speed and efficiency in servicing clients. Automating IT processes can assist in ensuring better record-keeping and adherence to deadlines through a system of automated triggers, email-reminders, etc. 

Training and Communication: In the case of small businesses where employees may work remotely or in various geographic locations, business owners can create frameworks which serve as information and training portals, thus reducing time and expenses involved in live training and knowledge transfers. 

The Importance of Benchmarking

Benchmarking is used by many business owners to assess the health of their businesses. An industry benchmark is typically a range of financial performance metrics in key areas, compiled by averaging data from a group of comparable businesses. These benchmarks provide a reference point for business owners to gauge the areas of financial success and measure progress against established goals.

When evaluating benchmarks to assess financial successes and progress the following should be considered:

Compatibility of data - When selecting comparable companies, the businesses selected should have many similar characteristics. For example, the comparable companies should be similar in size, offer similar products and/or services, have a similar corporate structure, and an equitable number of employees. Comparing a company with 500 employees to one that has 25 will not be a good comparison--even if they offered identical services.

Time period of data - It is imperative to understand the time frame of data comprising an established benchmark when comparing a business’ financial performance to that benchmark.  For example If you have a retail store and you want to compare it against other retail stores that are similar in size, product, and corporate structure and the data from the benchmark  was compiled for the period  January 1 2008 through December 31, 2008 and the data collected for the retail store is January 1 2012 thru  December 31,2012, the bench mark may be faulty because economic conditions may have changed substantially.

Calculation methodology - When developing benchmarks, it is important to know how the comparative businesses arrived at the calculations so that the financials are a true comparison.

Key metric comparisons - There are several ratios that businesses use to assess financial performance which can be useful to benchmark. These include

• profit margin - measure of profitability 
• current ratio - measure of liquidity, current assets/current liabilities 
• quick ratio -measures immediate cash liquidity, cash, plus accounts receivable/liabilities 
• debt/equity - measures how well a company is leveraging its debt 

Financial benchmarking is a valuable tool for small to mid-sized businesses in assessing how they compare with their peers. Alan Neal & Associates is currently offering a free analysis of your business processes and accounting system. If you would like to learn more on how we can assist with your business processes, including benchmarking, please call me at 423-756-4076 or email me at alan@alanneal.com. 

Elements Of Sound Accounting Systems

Whatever the type, whether it is open-book, or the double-entry bookkeeping, accounting systems form the backbone for a successful and profitable business. This is true, regardless of the industry you operate in. If there is any difference, it is in the elements that may differ for accounting in different industries. For example, accounting systems of a hospital or medical care home will differ greatly from that of a publishing house or a home furnishing supplier. However, this does not reduce the importance of even a single element; for a business to run profitably, it must pay close attention to its bookkeeping and accounting.

In general, accounting systems need to contain the following elements to ensure that the business' bottom line stays on the path to growth.

Bookkeeping: Accounting is incomplete without a sound bookkeeping system in place. Bookkeeping keeps track of essentials like entering transaction details that help you keep track of your cash. For example, when accounts payable and receivable are updated regularly by the bookkeeper, it allows you to know at a glance the amount of cash owed to you, or the payouts you need to make.

Payroll: If you have employees, particularly those working on variable terms, you would need to assign a hired accounting professional to take care of the payroll. Automated accounting systems in particular, take into consideration elements like variable working hours, holidays taken, etc. to ensure accurate and timely payroll.

CFO and Controller level insights: CFO or Controller-level recruiting can prove to be expensive for small businesses and enterprises. But these are indispensable to the growth of a business. Apart from reviewing existing accounting and bookkeeping practices, CFO and Controller level insights can provide your business with crucial decision-making inputs. For a business with budget constraints, outsourcing this element of their accounting systems can help make a big difference to the growth and expansion curve.

Why Should You Choose CFO Outsourcing?

Outsourcing key services such as administration management, accounting, or strategic CFO and CEO-level business insights can actually help you to focus on your business better. Often, more than poor services it is elements such as budget restrictions and inadequate back-end services management that can hamper the growth of a small business or an enterprise.

Why hire a CFO?

Why should you consider hiring a CFO? After all, they are a highly skilled talent and expensive to hire. But you don't always need to hire an in-house CFO. Outsourcing CFO-level expertise can prove to be immensely useful to your business. Some of the reasons that you need to consider a CFO for your business can include:

• Lack of accounting and financial expertise
• Lack of relevant bookkeeping expertise and practice
• Budget restrictions; CFO is an expensive resources

On the other hand, how can outsourcing CFO or CFO-level expertise help your company?

Outsourcing a CFO can help:

• Free up your time; help ensure you can focus on business growth and expansion
• Streamline the bookkeeping in your company
• Ensure accounting functions are carried out in a timely manner
• Streamline your inventory; put into place better inventory management
• Improve financial reporting
• Ensure company funds are utilized properly
• Advise on making better investment decisions
• Ensure your company outlines more effective credit terms with clients as well as providers and vendors

Further, outsourcing a critical function like that of a CFO can help your business make measurable savings as well. You not only save on salary and infrastructure, but also ensure that the company benefits from professional expertise.