As a business owner, reviewing your cash flows, budgets, and balance sheets may be the last thing you want to do. However, proactively reviewing your financial statements is essential and helps identify problems before they worsen. Here are three financial questions you should be asking yourself to stay on top of your business’ money:
1. “Why do I need a budget?”
Although creating and sticking to a budget can be challenging, it’s an essential money management tool. Consider your budget a financial roadmap for your business. They’ll help you maximize profits, recognize when things are off track, and manage problems when they arise.
When developing a budget you might consider:
- Using experience and results from your previous years in business.
- Identifying industry benchmarks through databases such as Industry Canada, Privco, and community knowledge sources, like us as Small Business BC.
- Adjusting benchmarks for local competition.
- Consulting a professional accountant.
Creating a Budget
Create your budget in Excel and update it monthly. Include a column listing what you actually spent, as well as a variance column that subtracts your actual spending from your budgeted spending. Be sure to identify any contributing causes to the variance.
Here are some resources to get you started:
A well-thought-out budget is the best way to plan for your business and reach your monetary goals. Budgets usually represent or are planned for a period of one year, so be prepared to develop a new one annually.
2. “How can I tell where my business is heading?”
Now that you’ve got your budget set, you might be wondering if your business is going in the right direction. Forecasting and projections are useful to determine if you’re on track.
- Forecasting – Estimates your future results and actions based on your assumptions.
- Projections – Use trend and variance analysis to show where your business is heading. When it comes to projections, you should investigate and understand the trends and variances that you see between your actual and forecasted projections.
You might be thinking, “Doesn’t my budget tell me where my business is heading?” The answer is, “Not quite.” While a budget is your financial roadmap, think of forecasting and projecting as the long-range weather forecast on the way to your destination. You wouldn’t spend all that time mapping out a journey only to potentially be driving through extreme weather two-thirds of the way.
Remember, no business has a magic crystal ball, so a perfect forecast is impossible. Often, the process of forecasting and variance analysis is more important than perfectly achieving the projected milestones.
3. “Why isn’t my cash equal to my profit?”
Perhaps your business is running smoothly and sales are good, but you notice that the amount of cash you have on hand is not equal to your business’s profit. This difference can be explained by how you account for profit versus accounting for cash flow.
Profit is calculated using revenues and expenses, which is different from a company’s cash flow.
- Revenue – Recorded when a sale is made, but the cash flowing into your account may not happen immediately. The cash inflow only occurs when the payment is received.
- Expenses – Recorded when the bill is received. The cash outflow occurs only when the bill is paid.
While managing cash flows is a challenge, effectively managing your expenses and receivables helps to ensure that enough cash is available for daily operations and for tackling potential challenges.
Small Business BC is Here to Help
SBBC is a non-profit resource centre for BC-based small businesses. Whatever your idea of success is, we’re here to provide holistic support and resources at every step of the journey. Check out our range of business webinars, on-demand E-Learning Education, our Talk to an Expert Advisories, or browse our business articles.
