Reflecting on my CFO and outsourced CFO days, I was normally called in when things were not going so well. As a result, I had to quickly get an understanding of what I was walking into and then act accordingly. It was common that the accounting processes and procedures were weak so I was normally working with imperfect information. Following is the process I would go through on day 1 along with the advice I gave any business owner to effectively gauge the pulse of their business on a daily basis. (This exercise assumes that transactions are posted on a daily basis.)

Run these reports in this order:

  1. Cash Report: Yes, cash is still king so the first report to run each morning is your cash balance. If you run this report first thing in the morning your bank account should have a higher balance than your accounting system because overnight ACH payments most likely have not been posted to the accounting system yet. Furthermore, all the checks you cut may not have cleared the bank. I preferred to use the accounting system balance because it was lower and forced me to manage cash even tighter. The moment you run out of access to cash is the moment you are out of business. The less cash you have, the less flexibility you have to manage the business. That is why this report is run first.
  2. Accounts Receivable (AR) Aging: The second closest asset to cash is AR so that is the second report to run. Who owes you money? When is it due? Why have some clients not paid yet? Run your AR aging report to see who is stringing you along and have your AR clerk contact them to collect your money.
  3. Inventory Aging: The third closest asset to cash is inventory, and inventory sitting on shelves ties up cash. Run an Inventory Aging report to determine what you have on hand and then ask why you have it and when it is going to be shipped.
  4. Open Sales Orders: The next closest “asset” to cash is open sales orders. Technically, it is not an asset on the balance sheet but an indication of future sales. This is one of my favorite reports because it goes to the heart of effectively managing your business and is a leading indicator of future performance. The first point of interest of the open sales orders report is to determine what was scheduled to ship prior to today but has still not shipped. That is a problem that needs to be addressed immediately that affects your customers. Did it really ship but accounting forgot to invoice? Do you not have the inventory or is production behind? Did the job not make it onto the production schedule? The second aspect of the report is what is due to be shipped today or in the near future. Based on current information, are you going to hit your delivery dates? If not, you still have time to get out in front of the problem or at least inform the client so they can plan accordingly. Lastly, depending on how long your lead time is, the open sales orders report allows you to understand future demand which may affect staffing levels, cash needed for inventory or even capital expenditure needs. Your clients will rate you on how well you can fill their orders. This report tells you how well you are doing and what still needs to be done to satisfy demand.
  5. AP Aging: The AP aging report tells you who you owe and when that money is due to go out. Compare your AP aging report balance to your cash report to determine if you have enough cash to pay your bills on time. If not, you most likely have a fundamental problem with the business that is not going to be solved overnight.
  6. Open Purchase Orders (OPO): The OPO report allows you to track how your vendors are performing at hitting their delivery dates and gives you an indication of future cash needs for the business. Compare the OPO report balance to cash and AR aging to determine if you will have enough cash to satisfy those purchase orders when they become due.
  7. Payroll: From the payroll report I was most interested in reviewing overtime hours. Paying overtime increases your labor cost by 50% so it is an important number to manage. I was also interested in how many people were on staff and their compensation compared to current and future sales. Labor is typically the second or third largest expense and needs to be managed very closely.
  8. Daily Production Report: I liked running the daily production report and comparing it to what was scheduled to be produced and then understanding what prevented the production schedule from being met.
  9. Daily Shipping Report with Gross Profit Margins: I used the daily shipping report with gross profit margins to make sure invoicing was done the night before and to check for invoicing errors by looking at the gross profit margins by invoice. I paid particular attention to low-margin invoices and then questioned why it was necessary to sell that product/service/customer at that low margin.
  10. Bid Sheet: The last report I reviewed was the bid sheet used to quote new jobs. I was surprised how often clients did not factor in a large enough margin to make the project worth doing, used incorrect cost information when producing a quote, or used incorrect formulas in their Excel template.

When run daily, these ten reports give you a great understanding of how your business is performing. Once you start to understand your baseline for each of the above variables, it is time to start dialing in each variable to effectively manage the cash cycle. If running and managing these reports is done daily, you don’t really need to wait for the financial reports to be produced at the end of a month because you already know how you are performing and have visibility to affect next month’s performance.

Ultimately, you can’t run a business without cash and you can’t accumulate cash without selling products/services at a profit. These reports enable you to understand your cash cycle and margins more effectively. To further discuss these and other business strategies, contact Transaction Advisory Services Director Tim Moellering.


Article written by:
Tim Moellering, CPA
Director, Transaction Advisory Services


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