Cash Flow Issues – failing to plan

Last week I talked about “Cash Flow Issues - not enough start up money.”  If you missed that post, you can review it HERE.  This week’s post is “Cash Flow Issues – failing to plan.”  Failing to plan properly is another financial reason small businesses fail.  This sounds like a non-financial reason, but it has a big financial component to it.  If you don’t take the time to develop a well prepared budget, you haven’t properly planned your finances for your business. Learn more in this week’s blog.

When people think of planning for a small business, they think of things like tasks you have to do, marketing, mission statements and new equipment.  But one of the most important plans to have for your business is your budget.

Budgets are basically the financial plan for your business.  It shows you what you can spend.  It shows you what revenue you think you are going to have for the year.  It shows you where you may have potential cash flow issues in the year.  It gives you a guide so you know when you are off.

Why do people struggle with preparing a budget for their business?  One reason is that when they go into business, they think that their business is just delivering the service or product that they sell.  They are usually pretty good at that and it is part of the reason that they are in business in the first place.  They don’t see themselves in the “bookkeeping” business.

But by ignoring the financial planning process for their business, they blind themselves in the area that everyone is there for, the finances.  Properly preparing a budget involves digging into your business to understand how it is operating financially.  It helps you see a larger picture of your business than just the day to day that demands our time and energy constantly. 

Done right, a budget gives you an opportunity to review what you are doing and think about whether that is the best way to do it.  You can review your vendors for pricing, your staff for inefficiencies and your customers for payment issues.

Monthly financial statements are the score board for your business.  The budget is the game plan for your money.  Your budget could reveal a miss match between expenses and revenues.  You can then find ways to cut costs and increase sales.  Your budget could reveal a period where the cash projections show that you are not going to have enough money.  It gives you an opportunity to make arrangements ahead of time rather than having to panic because you don’t have money to operate.

Budgets are a tool for all business owners, not just bookkeepers.

Expanding your business too fast without good budget projections is another planning failure.  It is easy to get caught up in the excitement of taking on something new, without realizing how much time, money and energy it takes to expand.

Most people like making more money, so expanding can be great for increasing how much you make.  But without a budget, you are not adequately planning for your finances.  Just as creating an annual budget gives you the opportunity to think through the coming year, using a budget as part of expanding your business gives you structure to build your expansion upon.

Using the budget will help you see what the effect of your potential expansion is going to have on your finances.  How will the expansion costs affect your cash flow?  Is your expansion going to take some time to get rolling?  Are you taking on new staff that needs to be paid while they are getting up to speed and learning how to do things your way?  Even the best employee has a learning curve and may need to develop relationships with customers before they start bringing in additional revenue.

Using a budget for an expansion will allow you to see the financial effects of that expansion.

Small business owners are naturally optimistic about their business.  That is part of what allows them to take the risk of being in business in the first place.  But that optimism can work against you also.  If you are too optimistic when you do your future projections, you can get yourself into financial trouble.

When you are doing financial projections, you also have to look at worst case scenarios so you are properly prepared financially for what might happen.  This doesn’t mean that you are expecting that worse case to come to pass.  Typical results are somewhere between optimistic best case projections and pessimistic worse case projections. 

But when you have prepared financially for that worst case scenario, you have created a buffer that allows you to concentrate on running the business instead of trying to figure out why your optimistic projections are off.

You can work toward your goal, the optimistic projection, but be financially prepared if your projections are off.  Your business will be better off because you took the time to develop a well prepared budget.

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God Bless your week!