Budgeting Basics for a Micro Business

 

For entrepreneurs, often the most difficult part of launching a business is preparing financial projections. It may not be the most enjoyable task, but budgeting is imperative for maximizing performance.

“Eight out of 10 companies fail in the first two years due to insufficient cash,” warns esteemed financial consultant Roni Fischer.

In addition, you’ll need to be on top of your financials in order to grow – whether you hope to obtain a bank loan, attract investors, invest in equipment, or hire employees.

“Companies need to develop both an annual operating budget and a cash plan,” says Ms. Fischer.

“The annual operating budget provides a roadmap for your operations for the next 12 months – including your projected sales to customers, your associated costs to produce these items, your marketing and customer services costs, as well as your overhead expenses,” she explains. “The difference between the revenue (sales to customers) and the costs is your projected income (or loss) for the year.

“Along with the annual operating budget, you’ll want to project your cash flow,” adds Ms. Fischer. “For early stage and emerging companies, cash flow is difficult to sustain as growth always requires cash. Therefore, it is imperative to know when you will be collecting receipts from your customers and when your bills need to be paid to ensure you have adequate cash to honor your payroll and vendor payment commitments.”

Ms. Fischer is president of RLF Associates, Inc. in the Los Angeles area. I’m very familiar with her work. As a leading consultant for over 25 years, she provides expert financial and management solutions for firms ranging from start-up companies to multi-hundred million dollar corporations.

Ms. Fischer offers the following guidance for preparing your monthly projections:

Key Elements for an Annual Operating Budget:

1. Prior Performance. If you have data from the prior year(s), this can be helpful in preparing your current year budget. 
2. Sales Projections. Be pragmatic about your forecast. Include how much you plan to sell and at what price. Anticipate the elasticity of customer demand vis-à-vis economic conditions and price points. 
3. Cost of Goods Sold. This includes materials and labor (your “direct” costs for producing the items), and your ”indirect” costs for manufacturing. 
4. Expenses. Include your sales and marketing expenses as well as your overhead costs – such as salaries, rent, utilities and supplies. 
5. Operating Income. Calculate sales, less cost of goods sold, less expenses to determine your operating income (or loss). 
6. Assumptions. Ensure that your assumptions are reasonable and achievable. Base your projections on your experience, instincts, market research and other available information.

Key Elements for a Cash Plan:

1. Beginning Cash Balance. Start with the cash you currently have in the bank. 
2. Cash Receipts. Estimate the cash you anticipate receiving from your customers; considering the payment terms you have offered to them. Keep in mind that although you may have “sales” in December, you may not collect the cash until January or February (or later). 
3. Cash Disbursements. Project the cash you will need to pay your expenses in a timely fashion. Consider every expense from payroll (and associated payroll taxes) to rent to other operating costs. 
4. Cash Surplus or Shortfall. Starting with your beginning cash balance, add your cash receipts, and subtract your cash disbursements. If the result is a “positive” number, you have a surplus. If the result is a “negative” number (less than zero), you have a shortfall, and will need to review your annual operating budget to determine which expenses you can reduce, which payments you can defer, or where you can obtain a loan to cover this shortfall. 
5. Financing. Determine if you have the required funds for the period in question. Hopefully, you will have a surplus. If not, consider other sources for obtaining money such as a bank line of credit, factoring your accounts receivable or obtaining a loan from friends or family members. Make sure you maintain a cash reserve for contingencies. 
6. Ending Cash Balance. Calculate your ending cash balance by starting with your beginning cash balance, adding your cash receipts and any financing, and subtracting your cash disbursements. The resulting amount will be the beginning cash balance for the next period.

You’ve no doubt heard the adage, “Cash is king.” So make certain you have ample reserves to operate your business.

Ms. Fischer’s Web site: www.rlfassociates.com.

(Note: She is a fellow member of Consultants West, www.consultantswest.com, a roundtable of veteran consultants in the Los Angeles area.)

From the Coach’s Corner, here are some related resource links:

Primer for Best Practices in Preparing Financial Statements

Accounting / Finance – Why and How to Determine Your Break-Even Point

In Any Economy, What Drives Your Profit, Really?

Embezzlement – Tips to Protect Your Nonprofit or Company Assets

6 Values for Financial Protection

11 Strategies to Keep your Small Business Floating above Water

“If you aren’t practicing and playing to be first, then maybe you shouldn’t be an entrepreneur.”

-Robert Kiyosaki

 

_________

Columnist Terry Corbell is also a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complimentary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?

 

Tech Planning: What If There’s A Double Dip?

 

Pick any region. Most respected economists and other experts believe economic growth will be tepid, at best. There are continuing concerns about the world’s economy, and it’s important to ask a key question: Are you ready for a possible double-dip recession?

Certainly, many global economic trends are eye-opening. Here in the U.S., job-growth and the consumers’ inability to buy are major concerns.

Moreover, public policy at all levels – federal, state and county, and city government – is hurting the nation.

At the federal level, stimulus spending that totals more than $1 trillion has been inefficient. Relatively few jobs are being created and there are constant calls for more spending. Policies are detrimental. The healthcare reforms are anything but productive. The legislation created 19 new taxes, it lacks cost-controls, and insurance premiums are mounting.

For years, state and local governments have been fiscally dysfunctional, too. They are still increasing taxes and slashing services.

Businesses are disappointed. Many lack an incentive to invest in human resources, marketing and technology.

The aggregate impact: A further deterioration of Americans’ financial and political freedoms.

So, it was not a surprise that technology-research firm Gartner recommends in a study that chief information officers should get ready for another downturn. That requires planning.

Authors of the study, Plan for a Second Recession, Now, wrote: “We urge these CIOs to leverage their recent experiences by preparing their enterprises should another economic downturn occur within the next 12 to 18 months.”

Gartner believes it’s important that CIOs communicate closely with senior company executives on priorities. Which IT projects for the next 18 months could be postponed or even disregarded?

My sense is that very function or project should be comprehensively studied and any spending should be approved. The budget needs to be detailed and every item needs to be justified. That’s called zero-based budgeting.

Just to cover all the bases, your department’s finances need to be constantly reviewed.

If your company is in dire financial straits and is attempting a financial turnaround, it’s also important to understand the perspectives of both the senior executive and the chief financial officer.  There must be a daily review in the form of a flash report. A flash report can be designed to monitor indicators on a daily basis and to evaluate your actual performance against the turnaround plan.  For more reading, see Step-by-Step Solutions for a Company Turnaround.

If a poor relationships exist between IT and the finance department, which is often the case, it’s important to understand the CFO mindset. You might want to read: Tech Trends: CFO’s the Boss, IT Departments Are Disappearing.

Good luck. Start planning and strap in the proverbial seatbelt if the roller-coaster ride proves to be harrowing.

From the Coach’s Corner, if you’re thinking about getting into business for yourself, I’d recommend reading: Eight Strategies to Consider Before Starting A Tech Business.

Not convinced about economic conditions? Here’s an eye-opening headline: Gartner Trims Worldwide IT Spending Growth Forecast to 3.9 Percent.

How Micro Businesses Can Position Themselves to Win

 

Small businesses are trying to cope with a longstanding structural economic problem. It’s nothing new, and makes it a challenge to keep working with enthusiasm.

We all know about the devastation caused by the recession. However, even before the recession hit in late 2007, many small businesses were already off track.

Here are two indicators:

First, the National Federation of Independent Business, reported its index of optimism among its members was down in early 2007. One gauge is employment. While 14 percent planned to hire more workers, 9 percent were planning to scale back their workforce.

Second, a 25 percent increase in credit card debt among small businesses raised eyebrows, according to the Small Business Administration (SBA).  The SBA said the number of small companies with loans under $100,000 skyrocketed 25 percent – from 15.2 million to 19 million businesses – from 2004 to 2005. Seventy percent of that increase was in credit card debt.

Loans for small businesses the previous year only increased 5.3 percent. So, the 25 percent credit-card debt trend was not a good omen heading into a New Year.

The SBA studied the lending of $1millon or less to 21 million companies by 8,799 banks. The aggregate debt: $600 billion.

All of this data underscores the important of due-diligence and hard work.  How are you poised to succeed in this landscape?

Here are some basics to consider:

Financial. Utilize the services of least a part-time, proactive accountant – get references, determine a division of responsibility in the event you’re audited, and choose a personality that meshes with yours.

Or, if budget is a challenge, purchase financial management software to produce accurate financial statements (balance sheet and profit-and-loss).

Track sales-to-expense ratios every 30 days. Monitor your inventory levels and project sales, receivables and cash – make certain to adjust your spending accordingly. Remember cash is king.  Here’s why and how to determine your break-even point. 

Understand the ratio between accounts payable and accounts receivable and their impact on cash flow. Focus on a capitalization approach for stability. That includes your earnings; and if necessary, short-term and long-term loans.

And closely monitor the work and performance of your accountant or financial advisor.

Strategic Planning. For overall business improvement, evaluate whether you need to make changes in the following:

• Your company’s focus – do you need new products or services?
• Cutting expenses
• Develop opportunities for growth
• Design an effective strategy to raise fees, prices or retainers
• Evaluate the most cost-effective revenue streams
• Leverage assets or resources for additional revenue
• Change vendors or strategic partners
• Evaluate systems, products or services needed to improve your billing, client service, marketing and selling
• use 11 strategies to keep your small business floating above water

Marketing. To increase revenue, consider:

• Analyze your strategies for shameless, self-promotion or marketing
• Assess your tactics in relationship-marketing
• Identify activities or organizations that are ideal to help you align your business goals and target the right clients or target audience
• Upgrade your networking strategies
• Develop new marketing collateral (i.e. blogging, brochure, courses, newsletters, reports, sales letters, teleseminars, webinars or workshops,)
• Use the 10 best marketing tips for growth even on a tight budget.

Good luck!

From the Coach’s Corner, don’t forget your personal improvement.

Here are some reminders:

• Identify what you need to read – business books, publications, Web sites or reports
• Determine which of your skills that need development
• Obtain a mentor
• Decide on enhancements needed in your office or home for better efficiency, inspiration or organization
• Here are more solutions to rejuvenate yourself and business.

“Passion is the single most powerful competitive advantage an organization can claim in building its success.” 

-Richard Chang

_________

Columnist Terry Corbell is also a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complimentary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?