Reviewing your company’s cash flows, budgets, and balance sheets may be the last thing you want to review as a business owner. However, proactively reviewing your financial statements is essential and may identify problems before they become an issue. Here are three financial questions you should be asking.
Why Do I Need a Budget?
Creating and sticking to a budget can be challenging; however, they are a necessary management tool. Think of your budget as a financial roadmap for your business. They are a valuable tool to help maximize profits, recognize when things are amiss, and manage problems.
When developing a budget you might consider:
- Utilizing your experience and results from your previous years in business.
- Identifying industry benchmarks through databases such as Industry Canada, Privco and community knowledge sources, such as Small Business BC.
- Adjusting benchmarks for local competition.
- Consulting a professional accountant.
Create your budget in Excel and update it monthly. Include a column for what you actually spent, as well as a variance column which subtracts your actual spending by your budgeted spending. Use the variance column to see if you need to adjust your budget or limit your spending. Be sure to identify any contributing causes to the variance.
Here are some resources to get you started:
- Tips for Businesses Determining Costs and Planning a Budget
- Business Budget Templates
- Budgeting as a Value-Added Exercise
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.
How Do 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 determining if you’re on track. Forecasting estimates your future results and actions based on your assumptions. Projections on the other hand are based on trend and variance analysis to show where your business is heading. When it comes to projections it’s important to 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?” 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 monsoon season 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.
Why Isn’t My Cash Equal to My Profit?
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 results because of 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 is recorded when a sale is made but the cash flowing into your account may not immediately happen. The cash inflow only occurs when the payment is received. So on paper you have recorded profit but in reality…not so much. Conversely, your expenses are recorded when the bill is received and 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 potential challenges.