How To Use Cash Flow To Craft A Better Budget

Knowing how far into the future you can accurately plan your finances can be a tricky task. Forecasting your expenses for the next month is usually much easier than trying to predict what will happen a year from now.

If you find yourself throwing your hands up in the air when it comes to budgeting your books for the year ahead, it’s important to follow through and avoid letting yourself get behind. Just like driving at night, your car has high beams for a reason––don’t let obstacles jump out of the dark at you when it’s too late to swerve out of the way.

The best way to cover all the bases with your budget is to create two separate annual plans. An operating budget focuses your finances around profitability. This, more than anything is a way to track your overall growth from year-to-year.

For small businesses and startups, a second budget based solely around cash flow can be extremely useful for more careful monitoring of both what’s coming in as well as what’s flowing out. As we’ve said before, a poor balance of cash flow can put an expiration date on your business unless steps are taken to reverse it in time.

Paving a path to profitability

Focusing specifically on the operating budget, this plan also accounts for more than just what’s coming in over a 12-month period. In more concise terms, the incoming side of the equations projects your gross sales as well as net sales. Further than that’s it will give you a good idea of your net profits and loses as you move a year ahead with your business.

As far as expenses are concerned, a complete budget should account for a list of one-time expenditures you can see coming down the road. These kinds of items can often slip through the cracks and end up unaccounted for. It’s best to cast a wide net rather than wonder why your numbers seem light at the end of the year. A possible scenario where this could happen might involve a move from one office to another. Items like new furniture, office supplies, and other seemingly smaller expenses can add up quickly over time.

This budget will also account for essential ongoing expenses––most common probably being rent. Other ongoing expenses you may want to take note of are­­: personnel expenses (payroll tax), utility bills, insurance plans, licensing and any third party services like accounting and legal teams.

Perhaps the biggest boon in taking the time to lay out a complete operating budget is the ability to experiment with business variables. For instance, say you’re able to cut your staffing over the next two months, or set a higher price for your product as it appreciates in value. These scenarios can point you towards more realistic profitability goals, giving you a practical sense of when to expect your business to earn the profits you think you can achieve.

Ensure your growth is secured with a cash flow budget

Although it’s often ignored among small business owners caught up in other aspects of their budding business, establishing a budget just to monitor and project cash flow is an essential piece of the financial puzzle. For small businesses especially, this budget can actually tell you more about where you’re going in the short term than a budget based around profitability can.

If you’re unfamiliar with cash flow as a concept, it’s an important metric to understand. You can call your cash flow positive if you have enough money in the bank to pay off your bills at any given time throughout the year. This is the big difference between having a positive cash flow and being profitable. While the operating budget may lead you to believe your finances are stable since you can call yourself profitable, you may be paying for things in advance and waiting on payments that are accounted for but not yet in your books.

The first step for small businesses and startups

Unlike established businesses with a history of financial data to start a budget with, startups need to start from zero. Instead of looking back within your business, gauge a starting point with your budget by researching your industry in depth and compare competitors in your market.

In terms of measuring your costs, try to record your expenses as accurately as possible, and take any widely known market changes into account. If your business will fluctuate seasonally, try to get data that you can put together to account for dramatic shifts in business accordingly.

Lastly, it’s important to keep current on your budget and not simply seal it away every year after you’ve worked out a plan. Check it at least once a month to gauge how well your financial forecasts match your actual income and expenses. A well-crafted budget is a great tool for catching unforeseen problems before they become damaging.

If you’re looking for a reliable accounting or CFO service willing to work through your budget with you, contact our start-up accounting and CFO services experts.

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Finding Startup Success Through Financial Metrics

When it comes to offering truly valuable advice to startups, the task of management can’t be brought up enough. While it’s helpful to zoom in and focus on key areas where management can be applied at the micro level of a business, those areas require an equally if not more competent central management team.

Whether an individual or a team comprises management, it’s essential for company leaders to establish actionable metrics by which to judge success or failure. For some businesses, certain metrics will matter more than others. Knowing how to find out the key areas of your business is one of the first big steps you can take towards getting your business working smoothly.

Think of your business in terms of its parts

A useful way to think about your company is to imagine it like a simple machine with inputs and outputs. As a manager, your task is to make sure right buttons are pressed when they should be while the others go idle. To keep the metaphor going, we all know how frustrating it can be when we’re forced to use a brand new technology without knowing how it works. Avid iPhone users are usually frustrated when they’re asked to operate a Windows phone when they have no prior experience and visa versa.

The point is, you need to understand your business through and through before you attempt to design a management system to keep its parts in good working order. The goal with every measurement decision is to make sure you can tell when the outputs are less productive than what you’re putting into it.

Putting communication first

Without a means to solve problems and recognize successes throughout your organization, it’s nearly impossible to envision a bright future for your business. All too often management teams pass the blame of their shortcomings onto the health of the market or other external circumstances they don’t have control over.

While downturns in the market should certainly be accounted for when evaluating yourself, throwing your hands in the air and hoping for better luck next time doesn’t pass for management. In order to get some real problem solving done, you’ll have to open the hood and have a look at all the parts of your business to find and isolate the problem. The systemic nature of problems within your business usually only reveal themselves once the management teams invests the energy in tracking the trail of breadcrumbs back to the original source.

By tracking comparatively poor earnings to poor sales, you may find that salesmen fell behind because they weren’t handed leads by the marketing team. By analyzing your marketing efforts over time, you may find that by downscaling your social media team, you’ve lost a significant amount of engagement which once accounted for a significant amount of your total leads volume.

Where a “band-aid solution” would have probably stopped at the sales team and resulted in restructuring a team that was actually doing everything right, you’ve not only let the actual problem go, but also hindered a part of the machine that was working well. It’s in these kinds of scenarios where poor management can gradually do more hard than good to both your business’ bottom line as well as employee morale.

Early points of focus management teams should pay close attention to

The best way to avoid the kinds of problems presented above is to designate standards by which to measure your business’ actions over time. While it may seem like a rudimentary lesson in business, it’s important to think of these concepts as they relate to one another rather than simply a list of things to check off each time you review your numbers.

In terms of meeting your most important goals early on, the three broad measurements to keep your eye on the most are your cash flow, profits/losses, and assessable growth. While every business obviously requires its own set of measurement parameters from which to judge success and failure, these are the elements of every business which should never be overlooked by your core management team.

If you’re a start-up owner and unsure of how to analyze these financial metrics or others, give us a call. Our outsourced accounting and CFO services experts can help you navigate these waters. Photo Credit: Biking Nikon SFO via Compfight cc

Common Small Business Financial Mistakes and How to Prevent Them

For many small business owners who are either new to entrepreneurship or struggling to adapt to some of today’s more innovative business technology, it’s easy to find yourself neglecting some very important financial practices essential to keeping your business on top of your competition in a fast-moving world.

Specifically for those who are newer than others when it comes to starting and maintaining a business, some tasks, which may appear to be of lesser relative importance to other responsibilities, can quickly start to hurt your business in some serious ways.

With that in mind, we’ve put together a list of some of the most commonly seen mistakes small businesses are making as a result of being overworked and undereducated about what matters most as you begin a business venture

Undercapitalizing early on

A major issue, which can plague an entrepreneur’s efforts before they even get off the ground, is having enough money to cover themselves in the short term. Raising initial capital can be extremely difficult unless a number of financial pieces fit together at the same time. While being optimistic about your business is certainly a  necessary early motivator, over optimism often clouds new business owners to the reality of how well they can expect to do during the first year of business.

Relying on your business to be self-sufficient within a year not only demonstrates a lack of practical business chops, but also can potentially lead to financial disaster if lenders are unable to collect on their investments when they expect to. Starting with sufficient initial capital is essential for businesses that experience early turbulence.

To be confident you can avoid this problem, try to mitigate unrestrained optimism about your product or service and be as conservative as possible when projecting your business into the short-term future. If you’re new to business, value the advice of those who have been in your shoes and pulled themselves out of the dark and into long-lasting success. At the very least, make sure you’re well-aware of your initial expenses and gather at least double the capital you project yourself to need.

Insufficient accounting considerations

Tracking your finances is a task that never ends. For those trying to juggle everything at once, it’s often one of the first business metrics to fall by wayside only to be noticed when it’s too late to reverse a negative trend. For business owners, glancing at your bank statements is not enough.

Although you may be entering the market with a ridiculous amount of capital in the bank, turning a blind eye to your cash flow can turn a small stream into a waterfall of lost money.

If you’re too busy to keep track of your books as well as your need to, hiring a bookkeeper either in-house or outsourced just to run basic financial reports can go further than you think. Accounting is much more than number crunching and calculations––it’s what allows you to track your performance with incredible accuracy. Seeing where cash is spent and projecting your growth into the future are two of the most essential parts to keeping a small business afloat in a turbulent business environment.

Poor resource allocation

Capital is meant to be spent; the trick is to know what to spend it on so you can start generating real revenue. When it comes to doling out your initial investments, carefully weigh the cost-benefit of everything decision you’re making.

By being smart with your resources, you can easily stop yourself from overspending before it starts to unbalance your cash flow. Before making a considerable investment in an item or service you’re unsure about, ask yourself if you can live without it––you might be surprised how little you actually need. 

If you’re looking for a reliable accounting or CFO service, contact our start-up accounting and CFO services experts.

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How To Maximize Your Chances Of Obtaining A Small Business Loan

For many small business owners, starting a small business means generating outside capital in addition to personal investment. Although certainly achievable, prospective small business owners shouldn’t go into the loan application process without going through the proper preparation. Receiving a loan often means doing some degree of research as well as meticulous organization and conceptualizing a coherent vision for the future.

Research local banks to rule out those who don’t specialize in your field

It’s important to understand that not all banks are the same. While some might cater specifically to budding entrepreneurs looking for a financial starting block, others may not offer business loans at all.

At a finer level, some financial institutions might offer loans only in specific areas of business while excluding others. Similarly, some may offer loans only to those businesses operating in a particular stage of the business cycle. These kinds of banks typically give loans to established businesses and exclude startups to mitigate risk but it’s best to look into such policies to make sure this is the case.

One of the key considerations to look for when “shopping” for banks is industry relevancy. If you’re confident in your proposal, focus on institutions that have partnered with similar businesses. Not only are these institutions typically more interested in businesses like yours, but will also have be better able to offer advice about your industry when specific financial questions arise.

Be fully prepared to explain your business proposition

Bankers rely completely on you to articulate your plan and vision for the company’s future. While confidence in your organization’s success should certainly characterize your overall presentation, bankers will not buy into lofty idealism without seeing a substantial financial plan fueling your optimism. Keep your plan practical and realistic––don’t overstate your goals.

A good way to keep your proposition within practical limits is to frame your plan around why consumers and other companies will be compelled to do business with you. A sensible way to get all of these ideas across at once is to lay out your best case business scenario along with the most likely one.

Formulate at least two ways to make good on your obligations to the bank

Along with establishing a viable business model for your short and long term future, the second big concern among banks considering a loan is the method of repayment. Typically, banks will be looking for two possible repayment sources. It’s up to you to formulate what these sources will be. Don’t rely on bankers to hold your hand and guide you toward a solution. This is your chance to convey a solid understanding of financial responsibility and planning.

If you’re struggling to put together a secondary plan, consider a pledge of collateral either business-related or personal. In addition, you could also establish a loan guarantee agreement among the owners or suppliers to reassure the bank their investment will be promptly repaid when due.

Get assistance from the Small Business Association if you’re struggling to formulate a proposal

The Small Business Association (SBA) can be a great financial resource for small businesses looking for extra assistance. In addition to providing government-backed loans through banks or credit unions, they also counsel small business owners primarily during the loan agreement process.

Although the SBA only provides direct loans and grants when assisting with disaster recovery, the programs offered through other banks can sometimes give eligible businesses longer repayment agreements as well as opportunities for businesses with bad credit to receive loans in the first place. If a potential lender is proposing a repayment plan too steep for your business to confidently enter into, these sorts of assistance programs can offer extra relief.

If you’re looking for a reliable accounting or CFO service, contact our start-up accounting and CFO services experts.

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3 Ways Small Businesses Can Get Paid With Online Payment Systems

Technology’s impact on the way organizations conduct business and interact with their customers has given way to major shifts in consumer expectations businesses should pay attention to. As online tools provide a higher level of convenience to the customer, they quickly come to rely on these conveniences all the time.

Online payments in particular have become a dimension of the sales process, which has quickly grown to become a standard expectation among a tech-savvy consumer base. As these remote payment methods become even more streamlined and simplified for the average consumer, businesses who can’t adapt accordingly will no doubt find themselves struggling to keep up.

For small businesses trying their best to mitigate expenses, implementing and maintaining online payment systems might seem like an expenditure, which will only threaten an already fragile cash flow. Fortunately, there are a growing number of ways to provide this level of accessibility while keeping your wallet intact. (more…)