As leaders, we’re often forced to pilot despite low visibility. But when it comes to finances, nothing is more dangerous than flying blind.
I can’t tell you how many accountants and bookkeepers I’ve interviewed who thought quarterly statements were enough to run a business. That’s nuts!
Some of us know this from experience, but if leaders don’t have current and correct information on revenue and expense targets, performance, and cash flows, it won’t be long before they crash and burn.
In 1922 Jimmy Doolittle became the first pilot to fly cross country in less than twenty-four hours. He planned to fly by the light of the moon, but bad storms kept him in total darkness for several very dangerous hours.
There had to be a better way.
Doolittle knew the right mix of instruments could give him the direction he needed in the dark. It took several years, but he figured out a combination of radio and gyroscopes could let him fly safely regardless of visibility. And he proved it in 1929 by flying a plane with a totally blacked-out cockpit.
When it comes to finances, leaders need the right mix of instruments too.
The Big 5 Reports You Need
The good news is that we don’t need a dashboard crammed with gauges and dials. It takes just five reports to get you off the ground and safely to your destination.
- Annual and monthly budget. This is kind of like a preprogrammed flight plan. It’s forward looking, projecting where you plan to go. If you don’t have a decent budget, you might as well forget flying.
Monthly profit and loss statement. Once you’re off the ground, are you staying on course? A P&L statement tracks your performance against the budget.
Weekly cash flow projection. P&Ls are lag measures. A rolling sixteen-week cash flow projection gives you a vital lead measure. You take your opening cash balance, add your projected receipts, and deduct your projected payments. It functions like radar telling you what’s coming up, providing time for you to adjust course if necessary.
P&L forecast. This is another important lead measure. A P&L forecast creates a forward-looking picture of your revenue and expenses. What’s great is that you can play with different scenarios and see how they’ll impact the year.
Balance sheet. It’s always good to know what your business is worth at any given moment, and there’s no better one-glance tool for that than a balance sheet.
These five reports work together like Doolittle’s instruments. Of the five, I have found the cash flow projection the most essential for tactical decision making.
It was an invaluable tool for steering through the Great Recession when I was CEO at Thomas Nelson, and it’s equally important for me now in a more entrepreneurial setting.
But they’ve all been helpful in steering through the storms and landing safely year after year—sometimes far ahead of schedule.
Question: What financial reports do you find most helpful in running your organization? What report do you wish you had?