Posted by What could possibly be more important to your small business than profits and cash flow, especially in our current economy? Almost everyone’s sales are off, and so it’s how we manage the money flow through the business (what happens after the sale) that makes the difference between profit and cash crunches. Your company’s survival depends on it. And after all, isn’t cash profit the reason you went into business in the first place? You likely keep books with QuickBooks or Peachtree or some such software, and let’s say you, or your bookkeeper, does a really good job of categorizing all the transactions, does good month-end work and is able to give you a P&L or Income Statement that you can feel is accurate and complete. Wonderful. There’s just one problem. What you’re looking at has already occurred. You can’t change the past. It’s too late. The one thing you can control is the future. The decisions you make today will affect what happens next.
Once you fully grasp the idea of only being able to control the future by making correct decisions today, you realize that you need to look forward, not backwards. You need to see as clearly as you can, and plan for profits. Just hoping profits come about just doesn’t cut it. If you want to look forward, you need a plan. Another name for this is a cash flow and profit forecast. This is not a budget. Budgets are useless for your small business. Budgets have their usefulness, but typically not in small, entrepreneurial businesses. Budgets are used by big companies as a way of providing financial accountability of lower level management. In a big company, it wouldn’t do to have everyone running around spending money that upper management didn’t plan for and approve. But chances are you, the owner, make all the major decisions in your company. What good is a budget to you? None. What you do want is to be in control. After all, part of why you started a business was to control your own destiny, right? A solid, well done cash flow and profit plan gives you greater control. It allows you to think more strategically, more long term. Budgets are static. A cash flow plan changes.
It has to change to be useful. After the month is over, actual numbers get plugged in. Conditions change, you find you were wrong on some estimates and so you change the plan! The idea here is to increase the predictive value. It starts out somewhat crude and gets better as you go. We are not used to looking to the future, we usually just wait and see what happens and deal with it then. Survival in today’s economy demands we do the best we can to see what lies ahead and take steps to avoid cash crunches. Do you know why businesses fail? Although there can be many causes, at the heart of what happens at the end, no matter what the cause, is that they run out of money. A business closes up when it runs out of money. Not managing the finances of the business well is preventable because decisions can be made to correct problems, if they are recognized in time and if they are acted on in time. Armed with a good plan you will think more strategically, you will begin to be more proactive.
Heck, you may even sleep better at night! You will, at the very least, be more assured of the future because you will be able to spot trends, see the cash crunch months in advance. You will know things, in time to do something about them. In other words, you will not be caught off guard. Helplessness is not a good feeling. The beauty is that an excellent predictor of the future is the past. You have a history to draw from. In the next article, I’ll write about the nuts and bolts of gleaning useful information from your accounting system to use when developing your forward-looking cash flow plan.
Bruce P. Van Cleve operates 10 Minute Payroll, Inc., providing payroll service which maximizes the service on our part and minimizes the work on your part. The customer only spends 10 minutes on each pay, it takes us a little longer! We do not take custody of your funds, ever. Payroll is a non-profit chore, it neither makes you money nor saves you to do it yourself. Take 10 minutes and add up all the costs and you may be surprised. Visit us at http://www.10minpay.com
Visit the tab labeled CF for more information related to this article. Bruce’s company also fills the niche between a small business’s bookkeeper and their CPA. Their clients save money by receiving training, setups, monthly oversight, cash flow forecasting on an as-needed basis at much less per hour than a CPA. We do not do income taxes and are therefore available year-round. Cash flow forecasting is the best way we know for you to run your business with maximum control. We can be reached at (814) 431-4212, or by email at [mailto:temminpay@me.com]tenminpay@me.com
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