Vital Budget Planning Tips for New Entrepreneurs
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 (rlf associates, inc).
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.
“Eight out of 10 companies fail in the first two years due to insufficient cash.”
Ms. Fischer offers the following guidance for preparing your monthly projections:
Key Elements for an Annual Operating Budget:
- Prior Performance. If you have data from the prior year(s), this can be helpful in preparing your current year budget.
- 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.
- Cost of Goods Sold. This includes materials and labor (your “direct” costs for producing the items), and your ”indirect” costs for manufacturing.
- Expenses. Include your sales and marketing expenses as well as your overhead costs – such as salaries, rent, utilities and supplies.
- Operating Income. Calculate sales, less cost of goods sold, less expenses to determine your operating income (or loss).
- 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:
- Beginning Cash Balance. Start with the cash you currently have in the bank.
- 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).
- 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.
- 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.
- 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.
- 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.
From the Coach’s Corner, here are some related resource links:
Primer for Best Practices in Preparing Financial Statements — A good financial system is vital for your business. Not only will a properly prepared financial statement tell you what’s transpired in your business, it will give you a snapshot regarding your future. Measurement of cash flow is paramount.
Accounting / Finance – Why and How to Determine Your Break-Even Point — Uncertainty can kill hope in business. Best practices in management mean having the right information to alleviate uncertainty in business. For that you need the right tools. One important tool – know your break-even point (BEP).
Do You Know What Drives Your Profit? (There Are 4 Drivers) — For profits, entrepreneurs must learn how to manage their financials and performance, which are difficult tasks. Savvy business owners know who their ideal clients or customers are. Entrepreneurs realize financial benefits when their revenue from business exceeds their expenses and taxes. This results in a much easier task – deciding whether to save, spend or invest the profit back into the business. So, it’s imperative to know what drives profit.
Embezzlement – 21 Tips to Protect Your Nonprofit or Company Assets — Embezzlement is a widespread nightmare in business and the public sector. If you surf the Internet using the key word, embezzlement, you’ll find seemingly countless headlines.
6 Values for Financial Protection — Part two of two-part series: “Solutions for a Roller Coaster Marketplace” Debt is the catalyst for all financial woes – for individuals and the aggregate economy in the United States and globally, esteemed associate Joey Tamer astutely reminds us.
11 Tips to Win Your Entrepreneurial (Marathon) Race — For successful small firms, strong cash flow doesn’t just happen. Advertising firms to tech startups have a system. They plan and implement with precision. Using these strategies, you, too, will safely walk the tightrope to stay above water.
“If you aren’t practicing and playing to be first, then maybe you shouldn’t be an entrepreneur.”
–Robert Kiyosaki
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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.
Photo courtesy nenetus at www.freedigitalphotos.net
Tech Planning: What If There’s Another Downturn?
Pick any region. Most respected economists and other experts believe economic growth will continue to be tepid, at best. Despite the hype over a so-called recovering economy, there are continuing concerns about the U.S. and world economies.
The all-important gross domestic product barely goes up each quarter.
It’s important to ask a key question: Have you prepared for a possible double-dip recession?
Why? Indicators are troubling.
Certainly, many other 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 ObamaCare 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.
Gartner study
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.
For U.S. economic forecasts, click here.
To see noteworthy economic analyses, click here.
“Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It’s not about money. It’s about the people you have, how you’re led, and how much you get it.”
-Steve Jobs
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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.
Photo courtesy of khunaspix at www.freedigitalphotos.net
