Crunching the numbers may not be the most enjoyable aspect of running your business, but there's wisdom in knowing where your money is coming from, where it's going and how to manage cash flow to fulfill your vision.
Following are several tips to consider when developing and using financial budgets.
Paint a full picture. To get a comprehensive overview of your company's finances, three types of financial budgets should be prepared sequentially: income statement, balance sheet and cash flow. First develop your income statement, which will forecast revenue, expenses and net income. You will need the estimated net income to prepare a pro forma (estimated) balance sheet. Last, but not least, the cash-flow budget will show all anticipated cash disbursements in the period you expect to pay them. To accurately project cash flow, you will need both income-statement and balance-sheet numbers.
Get help. Preparing financial budgets seems so daunting that many business owners avoid the process altogether. However, planning is the antidote for chronic cash crunches and shortsighted decision-making. Bookkeeping software helps makes the process faster, easier and more accurate. Most software includes a budgeting function and automatically generates all the necessary reports. And once initial budgets are set up, updates and refinements are relatively easy. Whatever method you use to develop your budget, it is advisable to get assistance from an accountant. Even if you're comfortable with preparing and evaluating financial reports, a CPA's objective review of your assumptions and projections can be invaluable.
Plan for the short- and long-term. Minimally, you should develop a month-to-month financial outlook for at least 12 months. If your business is seasonal, forecast your irregular cash-flow needs accordingly rather than dividing annual projected totals by 12. Use your annual budget to develop a quarter-to-quarter view, looking three years ahead to your longer-term business goals. You may only have to review and update the long-term forecast once a year. However, on a day-to-day basis, a solid 12-month cash-flow budget is critical to effectively managing your business and should be reviewed as often as necessary to keep on top of your cash situation.
Use automatic bill paying to improve cash flow. Your monthly expense budget will likely show recurring costs for services like phone, cable, wireless, Internet, shipping, courier and others. Instead of keeping track of multiple payment due dates and writing checks throughout the month, pay regularly recurring bills with your Business Card. You can gain more time to pay and more time to collect from your customers. Your bills are always paid on time and you avoid late fees that steal cash from your bottom line. Dozens of local, regional and national vendors will set up automatic bill payment at your request, at no extra cost to you.1
Manage the marketing timeline. A common budget mistake is to count sales in the same period as marketing spending. In reality, revenue trails behind the onset of an advertising or sales promotion campaign. Consequently, total out-of-pocket costs for marketing must be budgeted in advance of any projected revenue. Failure to budget sufficient funds in the appropriate time frame can result in poorly executed marketing, unnecessary crash crunches or unanticipated spending in later months.
Watch your balance sheet. Developing your basic income statement budget is essential. However, it is also important to budget the balance sheet, which enables you to consider cash-flow needs that impact more than typical income and expenses. For instance, you might need to move to a bigger location, build inventory on a new product, or take out a loan to purchase equipment. The balance sheet analysis will help you determine the potential effects on cash flow from higher rent, inventory purchases or loan payments.
Remember taxes. Your bank balance may not be yours to keep. Employee withholdings and sales taxes may sit in your bank account temporarily but will ultimately be owed to the government. Regularly review your balance sheet and cash-flow budget. Otherwise you may not realize until it's too late that you're short of funds to meet your tax obligations on time. Rather than incur late payment penalties, you can use your Card to pay federal business taxes and state and local property taxes in some locations.2
The bottom line: Effective financial budgeting can help you plan your spending so that money is available when bills come due and keep you focused on realizing your business goals.
Following are several tips to consider when developing and using financial budgets.
Paint a full picture. To get a comprehensive overview of your company's finances, three types of financial budgets should be prepared sequentially: income statement, balance sheet and cash flow. First develop your income statement, which will forecast revenue, expenses and net income. You will need the estimated net income to prepare a pro forma (estimated) balance sheet. Last, but not least, the cash-flow budget will show all anticipated cash disbursements in the period you expect to pay them. To accurately project cash flow, you will need both income-statement and balance-sheet numbers.
Get help. Preparing financial budgets seems so daunting that many business owners avoid the process altogether. However, planning is the antidote for chronic cash crunches and shortsighted decision-making. Bookkeeping software helps makes the process faster, easier and more accurate. Most software includes a budgeting function and automatically generates all the necessary reports. And once initial budgets are set up, updates and refinements are relatively easy. Whatever method you use to develop your budget, it is advisable to get assistance from an accountant. Even if you're comfortable with preparing and evaluating financial reports, a CPA's objective review of your assumptions and projections can be invaluable.
Plan for the short- and long-term. Minimally, you should develop a month-to-month financial outlook for at least 12 months. If your business is seasonal, forecast your irregular cash-flow needs accordingly rather than dividing annual projected totals by 12. Use your annual budget to develop a quarter-to-quarter view, looking three years ahead to your longer-term business goals. You may only have to review and update the long-term forecast once a year. However, on a day-to-day basis, a solid 12-month cash-flow budget is critical to effectively managing your business and should be reviewed as often as necessary to keep on top of your cash situation.
Use automatic bill paying to improve cash flow. Your monthly expense budget will likely show recurring costs for services like phone, cable, wireless, Internet, shipping, courier and others. Instead of keeping track of multiple payment due dates and writing checks throughout the month, pay regularly recurring bills with your Business Card. You can gain more time to pay and more time to collect from your customers. Your bills are always paid on time and you avoid late fees that steal cash from your bottom line. Dozens of local, regional and national vendors will set up automatic bill payment at your request, at no extra cost to you.1
Manage the marketing timeline. A common budget mistake is to count sales in the same period as marketing spending. In reality, revenue trails behind the onset of an advertising or sales promotion campaign. Consequently, total out-of-pocket costs for marketing must be budgeted in advance of any projected revenue. Failure to budget sufficient funds in the appropriate time frame can result in poorly executed marketing, unnecessary crash crunches or unanticipated spending in later months.
Watch your balance sheet. Developing your basic income statement budget is essential. However, it is also important to budget the balance sheet, which enables you to consider cash-flow needs that impact more than typical income and expenses. For instance, you might need to move to a bigger location, build inventory on a new product, or take out a loan to purchase equipment. The balance sheet analysis will help you determine the potential effects on cash flow from higher rent, inventory purchases or loan payments.
Remember taxes. Your bank balance may not be yours to keep. Employee withholdings and sales taxes may sit in your bank account temporarily but will ultimately be owed to the government. Regularly review your balance sheet and cash-flow budget. Otherwise you may not realize until it's too late that you're short of funds to meet your tax obligations on time. Rather than incur late payment penalties, you can use your Card to pay federal business taxes and state and local property taxes in some locations.2
The bottom line: Effective financial budgeting can help you plan your spending so that money is available when bills come due and keep you focused on realizing your business goals.
