How to Conduct a First Quarter Financial Review

Discover What Virtual Chief Financial Officers Look for When Analyzing Business Performance

When you’re serious about scaling your woman-owned business, proper financial management is critical. You invested a lot of time last year forecasting and preparing a strategic financial plan. For your work to pay off, you need to periodically assess business performance. We are approaching a significant checkpoint in this process – the end of the first financial quarter – which means it is time to prepare for a quarterly financial review.

Periodic financial review is a key component of proper business financial management. It gives an opportunity to gauge progress toward your goals and adjust course — while you still have time to adjust.

What Happens During a Quarterly Financial Review

Your company’s annual budget is your financial forecast for the year. It presents your best estimation of each month’s revenue, cost of sales, and ongoing operating expenses. During a quarterly review, you compare your actual financial numbers to your budgeted numbers, analyzing how well the business has performed to date against your forecast.

QuickBooks or similar software makes this process easy, allowing you to print a report showing actual numbers compared with budgeted numbers. If you do not use accounting software, use Excel or another spreadsheet program to compare your numbers.

Regular financial reviews are essential to ensure that you notice problems while you still have time to adjust your company’s course. At Evolve CFO Services, we encourage CEOs to review their numbers monthly, as well as quarterly, to better tune in to how the business is doing. The benefit of reviewing your company’s financial performance one quarter at a time is that month-to-month performance often fluctuates wildly. A quarterly review gives a better sense of the overall direction a company is headed.

Start with First Quarter Financial Revenue

We start our financial analysis by reviewing the total revenue received in the first quarter. How does this total compare to your forecast?

In general, you should be one-quarter of the way toward your annual goal, unless your business is seasonal or tends to fluctuate significantly from quarter to quarter. In that case, look carefully at what you projected for first quarter. Did you hit your target?

Then dive deeper into the numbers, looking at revenue in each category and even line by line. How has each revenue stream performed to date? This closer review reveals when overperformance in one category is masking underperformance in another category.

For example, let’s say you run a business that renews its annual service contracts in the first quarter, offering a discounted price to clients who pay in full by January 31. Otherwise, services are billed as they are delivered.

Your budget would reflect an anticipated revenue bump in January and early February as the pay-in-full clients send in payment. For the remainder of the year, your budget would show steady revenue as your other clients make their monthly payments. 

By comparing the amount of revenue received by March 31, you can gauge how well your company will perform if it stays on its current course. Let’s say that first quarter revenue is down by 25 percent. Take note of this fact, and then move to the next step.

Explore Why Revenue Is Trending the Way It Is

If your revenue is on track with your forecast, congratulations! If it’s not, now is the time to figure out what is going on, so you can identify the best way to adjust your strategy.

Let’s go back to our fictitious example. First quarter revenue is down by 25 percent. Initially, you might think that’s a bad sign. But when you dig into your numbers, you see that you’ve actually brought in a few new clients. But fewer clients overall took advantage of your discount. Instead, they opted for the pay-as-you-go plan, which costs them more, but allows them to spread their payments out over the entire year.

In this scenario, your annual revenue will actually increase, because you’re giving fewer discounts. Although first-quarter revenue is down, your revenue for the entire year will actually go up.

Now let’s imagine that the opposite happened, and first quarter revenue was actually up. Upon further exploration, you realize it’s because you landed an additional client who paid in full. This unanticipated contract may seem like a positive sign. But in a way, it’s actually a concern. Your forecasting process should have included whatever contracts were in your sales pipeline. Celebrate the additional revenue, but also explore why your forecast was off – and what changes you need to make to the remaining months in your forecast.

Review and Adjust Expenses

Let’s go back to our original scenario, where first quarter financial revenue was lower than projected. Although you know that overall, the company will be fine, not receiving the revenue you anticipated in March will impact your cash flow.

Perhaps you had planned to invest in new equipment with the huge influx of financial revenue you were to receive, or perhaps you were going to hire additional staff to service the new clients you signed. But without the increased revenue that would have resulted from clients choosing to pay in full up front, you might need to delay making these investments.

Here’s another scenario: You discover that the reason you missed your first quarter financial goal is that a new $1 million contract scheduled to start in March has been pushed back to start in second quarter. Once again, this delay in revenue will impact cash flow. If you’ve generated only $2 million in revenue, but are carrying expenses for the $3 million in projected revenue, you may run short on cash. You need to explore whether you can adjust your spending.

How much you can adjust depends on the different sections of your budget. Operating expenses are fixed, so there probably is not much you can do with these expenses. The section you want to focus on is your Cost of Goods Sold (CGS) – the expenses that are directly tied to the delivery of goods and services. CGS must be managed to actual revenue. If you generated only $2 million in revenue, you should not incur CGS for the $3 million in revenue that you projected. In this scenario, you’d look at the inventory or raw goods you would have purchased to fulfill the $1 million in sales that has been pushed back to second quarter.

If your cash flow is impacted significantly, you may need to dip into your cash reserves or line of credit to cover your operating expenses. More helpful tips are available here: Top 5 Ways to Manage Cash Flow During a Crisis.

Adjust Your Strategic Financial Plan

The last step in the quarterly strategic financial management review is deciding if – and how – you might need to adjust your plan for the remainder of the year.

If your actual first-quarter revenue was higher or lower than budgeted, look at how this will impact the remaining months. Did you simply receive revenue earlier or later than expected? In these cases, you’ll need to adjust your projects for the remaining months.

You received revenue that was truly unexpected, your projection for total annual revenue needs to be increased. Likewise, if your revenue was lower than anticipated and not merely shifted to later in the year, you might need to adjust your projections for the remaining months and/or hustle to fill your pipeline.

Also look at your projected expenses and cashflow for the remaining three quarters. Do you need to adjust when, where and how you’ll spend money? Do what you must to ensure that you can cover your expenses, ideally without using your line of credit.

Strategic Financial Planning Is Key to Navigating Business Waters

Business is unpredictable. Strategic financial and business planning tries to mitigate this basic fact by using research and analysis to make educated predictions, as well as creating plans that consider multiple possible realities. But no matter how much or how well you’ve planned, you must be prepared for factors that are outside of your control to push your company off course, just as wind and currents affect the course of a ship.

Strategic financial planning gives you the control you want over your business and its success. Analyze your progress quarterly at the very least (if not monthly), so you can take corrective action at the right time to get your business to where you want it to be by the end of the fiscal year.

Knowing how to interpret your numbers and adjust your strategic financial plan can be challenging. We’re here to help. Book a complimentary, no-obligation Financial Strategies & Solutions Session with one of our highly trained virtual CFOs to explore how we can help.



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