Article first published Dec. 3, 2019. Image: two people marking up shared pages of a plan next to their computers
Does this sound like you?
Planning completed: Thanksgiving Dinner – check
Planning to do: Holiday party – check
Business Finances – oh, well, you know
Throughout my consulting I’ve been amazed at the number of small and small midsized businesses that don’t plan their finances. They can’t answer questions such as: what is the cash flow? What can we purchase when to add capacity? How can we use our financials to mold performance and grow?
While not the entirety of business, financial aspects are extremely important. Most businesses in the U.S. are required by the IRS to make a profit 3 years out of every 5-year segment. Will you? And if you’re avoiding financial planning, what are your reasons? Do you really want to test the IRS?
Here are 3 “reasons” you and your leadership team can start changing now. (our free webinar covers others)
Uncomfortable with financial numbers
Many business owners are fabulous in what their business does, but not so great on the business side – especially when it comes to using arcane financial numbers to determine how to run a business. Most people don’t grow up talking cash flows and margins at the dinner table. And that’s ok. Unlike technology, how to measure cash flows and margins doesn’t change rapidly, even though what is being measured may – and that’s why you need a plan.
The purpose of this plan is to answer one question: Will the business have enough money to cover its spending? Start with the easier pieces that mimic your home budget; how much must you have to cover the repeated expenses such as labor and utilities and rent and insurance?
Operating cash flow for the month? What revenue is coming in this month from customers (your accounts receivable)? What suppliers or business credit card transactions or office spending must you pay this month (accounts payable)? Cash flow is just cash in minus cash out. See, you’ve got this.
Don’t know how to plan
You can think of financial planning as an organizational method. You want to purchase a new computer; when makes financial sense? Remember those Cash Flow numbers? If you create a spreadsheet or use financial software, figure out what cash is left each month based on what you have already committed and expect to spend and what revenue you forecast you will bring in each month.
Need help on the forecast? You can use last year’s monthly revenue numbers. Or you could capture monthly hard sales (what you’ve already sold), add soft sales (what you think is coming in each month based on sales insight) and add what more you plan to sell each month based on realistic growth (what you want to have come in – remember, stay realistic).
What initiatives are you planning for the upcoming year? How much will each cost (purchased items, overtime, paid help…) over what amount of time? What special expenditures are coming up when? Put these in that same month-by-month financial planning you already started.
Once you’ve determined your one-year month-by-month plan, when does the cash flow show you can afford a new computer? If you have a business credit card, you could even purchase the computer a month early (financially called 30-day credit terms).
Are you going negative anywhere? If so, can you push some spending back? Can you rework the initiative to do only the most critical pieces in the upcoming year? Are there months or seasons where you need to sell at least a certain amount more to stay positive financially? The earlier you know these things, the sooner you and your entire team can begin working on the issues.
Don’t know how to use anyway
The trickiest part is how to use financial numbers to stimulate business growth. Many businesses use cost cutting as a way to grow. It’s really not growth because you are not bringing in more revenue – which is growth. Be careful, while cost containment is an absolute necessity, cost cutting becomes an end in itself all too easily and soon, the financial line you are capturing that cost cutting on, well, it looks “good” but the business has trouble providing service or quality products or enough people to answer customer calls. More than just “fat” gets cut.
One of the tricks with financial numbers is to know what is too much and what is too little on any expense line. This is what is meant when people talk about being in budget.
Here you are – already using your financial plan. And you’ve already begun communicating what issues may be coming up based on the plan. Combining the two, you now capture and communicate what other areas in the business are hoping to purchase or put into place for what amount of cash during your planning time. Your plan shows when two or more different, but perfectly needed initiatives, are being planned for the same time and how much they will cost in total. If the cash flow doesn’t work (financial risk), prioritization is in order and catastrophe is avoided.
When you meet with your leadership team, reviewing how close or how far you were from meeting your financial plans is a monthly topic – along with how to improve. You’re putting your plan in action.
Remember, you’re not alone being a bit nervous about planning and using your financials.
Lots of SMB’s need to better understand financial planning. You can start with our FREE webinar.
You can also take affordable financial planning courses at community colleges, from groups such as the Center for Women and Enterprise, and provided by local training groups.
Keywords and Concepts: financial planning, cash flow, financial risk
Cynthia Kalina-Kaminsky is the president of Process & Strategy Solutions Her Recession-Proofing Your Business series helps owners, CEOs, and decision makers plot paths to growth, and increase revenue by eliminating internal chaos through organization customers pay for.
For companies ready to eliminate the chaos of not having a plan when times get tough and you don’t know how to move forward: watch our FREE webinar and start learning how.