So, here we are again. Holiday music is jingling throughout stores and the year will soon be coming to an end. In fact, this will be the last blog post you read from me until 2017! What does the end of the year mean besides turkey, sleigh bells and mistletoe? For business owners it’s the finale of the business plans they laid out for 2016. This is the time when businesses should be taking a hard look at what worked and what didn’t work this year, including budget and cash-flow projections. This can be hard to remember when many are starting to get with their accountants regarding taxes that will be coming due in April, but it needs to be a priority.
You should be familiar with both of these terms and have a good idea of how you did with these in 2016; If you’re not, here are the definitions:
Budget: An estimate of income and expenditure for a set period of time.
Cash Flow Projection: Looking at when money comes in, when money goes out, and how much is left after monthly expenses.
While having a budget in place is essential, it is just as essential to know your cash flow projection.
A company can be profitable but still get into trouble if they don’t have good cash flow. So, when reviewing your budget for 2016 and looking at a new budget for 2017, you will also want to look at whether or not you had enough positive cash flow.
For example, if a company’s bills come to $20,000 per month and they bring in $30,000 per month, one might assume the company is doing fine. But, if their $20,000 in bills are always payable between the 1st and the 14th of the month and all their revenue comes in between the 20th and the 30th of the month, this could become an issue. If they are constantly paying bills two weeks late, they are probably also accruing late fees and interest. Now what appeared to be a $10,000 surplus is actually going to be a bit less due to those fees and interest charges. The company is also put into a tight spot with actual cash on hand to use for purchases, training and upgrades because they are in the red for the first half of every month. This becomes an even larger problem if the company has some months where they make less than their normal monthly revenue. Over time, the lack of cash on hand can make a company become solvent and it can take merely a few bad months to put them out of business! This is serious stuff folks!
Where do I start?
I wanted to grab your attention with the cash flow first because I think anyone who has owned a business has experienced at least some issues with cash flow at some point along the way. However, budget is where you need to start. Most of you probably already have been utilizing a budget, or at least creating one annually, even if you don’t stick to it (if that’s the case, please reach out to Accounting Girl - we can help you figure out a realistic budget). If you’re not sticking pretty close to your budget, you can be setting yourself up for failure down the road. Of course you will always have some variable expenses, but a good accountant can help you get as close as possible when you’re planning your budget, to ensure you stay on track throughout the year.
Start by looking at your previous year’s budget. How close were you to your actual income versus expenses? Were you accurate on what your expenses were going to cost you? Were your variable expenses double what you had estimated them to be? It is important to know these things before you start to plan your budget for 2017. If you were way off last year, and you plan on basically using the same budget for 2017, you’re already on a slippery slope.
Do you think your office will need new computers this year? Will you need to make any large equipment purchases that you didn’t need to make last year? All these little (or not so little) things can add up quickly.
Now about that cash flow projection…
Okay, we’re back to this now. So a budget is all fine and dandy and, as I hope I made clear, extremely important. However, you can totally be sticking to your budget and still have issues doing what you need to, when you need to, for the very reasons we began discussing above. This is where our super heroes will prove abundantly useful; especially if you stuck to your budget this year, but still felt the struggle. There’s a really good chance that the pinch you felt was due to lack of cash flow.
Think about it… what if you know that June and July are your worst months every year. If you know you’re income has a two week lag from when your payables are due, and then you have two bad months, but still need to make a large equipment purchase in August to prepare for your busy season, how do you think that’s going to work out? Exactly… it’s not.
You can conquer this task yourself, but if you’re already an established business, chances are you will not and should not be spending your time figuring this stuff out yourself. If you’re a startup, there are some useful tools out there. For instance, Accounting Girl, LLC, has some free financial templates that will help you crunch these numbers.
That seems like a ton of work! Well, yes it is, but it is imperative to roll up those sleeves and get it done; that means both budget AND cash flow projection. You will surely be thanking yourself come August when you have the cash flow to swing that new equipment purchase. There are definitely strategies that can be put in place to ensure cash flow is there when you need it. Often, your accountant will have recommendations on the best way to go about new purchases as well. So not only will you have the positive cash flow to handle the budget you put in place, but you may even be able to save money! Wouldn’t it be awesome at the end of 2017 to realize that you came in under budget for the year?!