The Problem with Budgets

One of the biggest problems for a business owner is inconsistent cash flow and having access to adequate working capital to run and grow their business.?

Better cash flow equals better profitability. Better profitability provides you with more freedom, and less stress, and is aligned with why you started your business in the first place!?

Most businesses are great at delivering their product and/or/service but the owner also desires to be a better financial manager.??

They want a more simple way to make informed business decisions based on their numbers.??

Oftentimes they don’t have the financial knowledge…even though the answers are right in front of them.??

Understanding your numbers will help you run your business without having to become a CFO or Accountant. It’s easier than you think!

• The first step is learning HOW to READ your financial statements.
• The second step is knowing HOW to RUN your business by those numbers.??

You may be comfortable with some of your financial reports like your P&L and aging reports, but many business owners neglect their balance sheet or are unaware of some of the easy-to-calculate ratios and insights to help them improve their bottom line.

Finance is the language of business, and understanding this language will dramatically improve your profits.?

There are a few key financial reports, and once you begin to master them, you will see an immediate improvement in your cash flow, working capital, and profitability!

It can feel overwhelming to build a budget from scratch. Also, a budget can feel restrictive. That's why I like to call it a Profit Plan. It's easy to build and more profit means more freedom!

The three key reports are:

1. BALANCE SHEET: Understand the critical easy-to-calculate ratios and insights on your Balance Sheet. Some of these ratios include the Current Ratio, the A/R Turnover Ratio, and the Leverage Ratio.? The balance sheet is a great forecasting tool and “bathroom scale” that will reveal the financial health score of your company. Weigh yourself monthly!??I have a PDF on these ratios if you’d like more information, it’s called my Balance Sheet Bible.
2. BUDGET: Use your historical financial data to build 3 budget scenarios (Best Case, Worst Case, and Likely Case).? You can easily import your historical data into a 2023 Budget format from your accounting software (like QuickBooks), and then make adjustments (instead of building from scratch).?Make sure you make money even in your Worst Case Scenario model, but launch and monitor your “Likely Case Scenario” Budget/Profit Plan.
3. REVIEW YOUR MONTHLY FINANCIAL REPORTS: Have a monthly “Business Meeting” with yourself, key management, and/or an outside advisor.??Put it on the calendar!

• Balance Sheet, A/R, and A/P agings (mentioned above).
• Budget (mentioned above).
• Profit and Loss Statement. Format your P&L as a “Percentage of Sales” so you can review and set benchmarks.??Run your P&L reports on both a Cash and Accrual basis so you can pinpoint your actual and projected cash flow.

To begin, pick 4-5 five major expense categories.? They often include Supplies, Cost of Goods Sold, Gross Profit Margin, Salaries/Benefits, Rent/Occupancy, Net Profit Margin, and any expense category over 10% of total Revenue.? You won’t likely cut your way to prosperity.? However, when you format your P&L this way, it will open your eyes, and you will gain new clarity.? You will get a better handle on your expenses, but more importantly, you’ll be able to track the impact of additional revenue as the cash flows through your company.?

CONCLUSION: Just like knowing your numbers improves your physical health, implementing these strategies in your business will improve your financial health.

Need additional help??

I run a free 45-minute monthly workshop on this topic.? The next workshop is December 8, 2022, at 10am EST.? Why not jump in now and get a start on the New Year with a 2023 Profit Plan already in place?? The Registration link is HERE.