7 Forward-Looking Ways to Use Your Financial Numbers
After the holidays, people get focused on their New Year’s Resolutions. Especially entrepreneurs and planning-lovers! We’re ready to get started and make this the best year yet. We’ve got the new fitness equipment, books, or thrown out all the sugar. It’s an exciting time!
After a few weeks though (say by the middle-to-end of February), the appeal starts to wane. Sugar sneaks back in. The equipment and books gather dust. We’re losing our motivation.
I see this often with entrepreneurs who haven’t managed their books as well as they’d like to. They decide that this year will be different. They are interested and determined to get their finances under control.
But, it’s hard to stay determined. Regular life sets back in, and suddenly it’s May and you forgot about your commitment to financial organization.
The problem isn’t that you’ve fallen behind. It’s that you don’t have the right motivation to keep up with your books. Most people *hate* bookkeeping and taxes. In fact, 40% of business owners say it’s the worst part of owning a business. Honestly, I’m surprised that number isn’t higher!
Your books are a tool. They are not a mere record of your past. You use them as the basis to monitor the present and shape your future. You can use them to be proactive in managing your business if you know how to use them.
Let’s knock the dust off your books so I can show what you’re missing out on. You can use your books to make decisions, pivot, and grow your biz.
Here are 7 visionary ways to use your financial numbers in your small business.
1. Cash Flow Forecasting
One of the biggest stumbling blocks for a growing small business is a cash-flow crunch. If you run out, you can damage your reputation or even go bust. According to Business Insider, 82% of small businesses fail because of cash-flow problems. So this is the first thing we need to address.
Cash flow forecasting is all about the timing of cash flowing in and out of your bank account. You’re looking ahead so that you can foresee any hiccups and use any excess wisely.
The best way to monitor cash flow is using an app. There are several great ones on the market, including CashFlowTool, Cash Flow Frog, and Businest. Other advanced analytics apps, like Liveplan, include cash flow forecasting as well.
Using trends and your current QuickBooks data, these apps project your cash balance on future dates. You can play with the trends to test different scenarios. For instance, if you increase expenses by hiring another employee, you can see how that will impact your cash balances.
In an upcoming blog, I’ll go into depth on managing cash flow. Be sure to subscribe to my emails to not miss updates like these.
2. Budgeting
Are you on track to make the net income you need this year? If you are the primary breadwinner of your family, or even if you’re single, you need to make sure you are on the right track. This means you need to have a budget and use it.
Reviewing your financial results is like a hammer. It’s helpful, but it doesn’t give you any context. When you compare your results to a budget, you’ve upgraded to a nail gun.
You’ll know if you are on track right away. Going line by line, you can pinpoint where you need to course correct. You can dig into irregularities, unexpected transactions, and big variances. With this analysis in hand, you can make the changes necessary to your operations and future purchases to help you make or exceed your ideal profit.
Using QBO, it’s very easy to create a budget and run reports comparing it to your results. Add the report to your monthly management package and review it during Month End Close.
3. Analyzing Purchases
Before you make a big decision, take a moment to make sure it’s a wise one. You want to ensure that you’ll make the desired return on your investment and that it’s the best next move.
Anytime you’re deciding whether to hire an employee, attend a faraway conference, or buy equipment, define what you expect to get in return. Calculate all the costs involved. Then compare the two to make sure it’s a wise investment.
This process can get quite complex. For more information, check out this blog on how to evaluate big purchases.
4. Planning Your Pricing Model
Plan for profit. Meaning when you price your services, take into account all the costs and the desired profit margin. For new products, you may need to estimate costs. Once you have a few months of data, you can update your model with the actual costs.
You can do this for both products and services. The types of costs you include will vary based upon what you’re offering. Be realistic, add in your desired profit, and give yourself a little more wiggle room. This is especially helpful if you are submitting proposals or bidding on contracts. You should use your pricing model every time.
If done correctly, you’ll make money on every sale. Or nearly every sale - stuff happens from which you can learn and improve your model. You should review your prices and update them at least once a year.
5. Monitoring Invoices & Bills
Everybody is busy and things will slip through the cracks. Try not to let those be unpaid customer invoices and erroneous bills by keeping close tabs on them. Both of these influence cash flow, which we know is vital to your business.
For invoices, you want to make sure bills are paid on time, and follow up with customers regularly. You should have payment terms and due dates on each invoice. You’re 8 times more likely to be paid on time when you state the due date!
Depending on your business, you may need to monitor returns or declined payments. The sooner you respond, the more likely you are to have a favorable outcome.
For bills, it’s best to pay bills when they are due and not before. The only exception is if the vendor offers a discount for paying early. Check your bills carefully to ensure that you aren’t billed twice and that there are no errors. Again, the sooner you catch an issue, the more likely you are to have a favorable outcome.
6. Benchmarking
In case you need it, you have my permission to be nosy. Benchmarking is when you compare how your business is doing to your competitors and industry. Sometimes you’ll compare dollar values, other times it will be ratios.
The point is not to see how you compare. The point is to see where you excel and where you’ve fallen behind. If another company has a better result, find out what they’re doing and decide if that change would be right for your company. The reverse is true as well. You may identify your competitive advantage and what you should do more of to get even better results. Looking at competitors can uncover blind spots and opportunities. It’s important strategic analysis, as well as financial.
7. Tax Planning
When you are on top of your finances, you can take advantage of many tax planning strategies. Most you’ll need to implement before December 31st.
Businesses have many more opportunities than individuals because they are taxed on their net income (individuals are taxed on everything they receive).
The most common action is to buy equipment, prepay expenses, or make a large investment to reduce your current year’s taxable income. Other options depend on your legal structure.
For example, by electing to be taxed as an S-Corporation, you can lower your taxes permanently.
Eventually, you’ll have to pay taxes. However, you can exercise some control over how much and when.
Wondering if you’re ready to become an S-Corp? Take my quiz and find out!
You can get more out of your books than just financial reports and tax returns.
That is the bare minimum you have to do, and you’re handicapping yourself if you stop there. Your books are a tool. Maintaining them is the foundation for using that tool. The real benefit comes from using them to make data- & fact-driven, wise decisions.
Start small, with one or two of the items above. These are complex but so valuable once you see them in action.
Give yourself a competitive advantage and ask your CPA if they offer these services. If they don’t, send me a message. Only 32% of businesses have an accountant and even more have zero advisors, so yes, these will give you an edge and help your business flourish!