PROPER PLANNING – PART 2

In Part one of our Proper Planning series we discussed the necessity of knowing your history in order to plan for your future. Setting up your bookkeeping system and correctly tracking transactions are key components in ensuring you have accurate historical data. From there it becomes easy to prepare the reports needed for analysis.

Today, in part two, we will discuss the present. Where do you stand right now? What is the financial state of your business in real time? Can you easily access this information or will it require stacks of paper, a calculator and a trip to your online banking website? If your accounting systems are set up properly this should be a simple, but extremely important, exercise.

In most business there are three key components you need to know:

  • What is my cash on hand?
  • How much is owed to me?
  • What do I owe?

This is your down-n-dirty liquidity equation (cash + receivables – payables) and should be a number small business owners are aware of at all times.

Remember when looking at your cash on hand to include outstanding transactions. Unless all of your business is conducted through online payments and direct deposits you will not be able to see this online. The check register in your accounting system should be the best place to find an accurate cash balance.

When customer invoices are entered in a timely manner finding your accounts receivable total should be a matter of a couple of clicks. QuickBooks and other accounting systems provide multiple a/r reports.

The same is true for your payables. Accurate and timely entry of vendor bills allows for easy access to reports with varying levels of detail.

You should now have the basic* information needed to prepare a realistic and achievable financial plan for your business. You have the historical data and know you current liquidity status. In the next Proper Planning installment we will start discussing how to use this information to generate a financial plan.

*Depending on the nature of your business, there may be other information that needs to be taken into account. This could include loan payments, payroll and sales tax liabilities, monies owed to/from shareholders, inventory levels, etc.

PROPER PLANNING – PART ONE

Unfortunately, with a lot of small businesses the old axiom proves true: they don’t plan to fail, they fail to plan. Your typical new entrepreneur jumps in feet first and the extent of the plan is to “make money.” It is only after that first meeting with the CPA or banker when they realize there is a lot more to it.

There are multiple pieces to a good a good business plan and they are all very important. The most critical of these is the financial piece. The adage of ‘Cash is King’ has never been more true. The Small Business Administration statistics show that fully 50% of new businesses will not be around in five years. The chief reason? Poor financial management.

There are three basic components to creating a financial plan for an existing business. No surprise, they are

  • Historical data
  • Present condition
  • Future projections.

The first of these is usually either the hardest or easiest and our focus for Part One of Proper Planning.

“Good” historical data is going to consist of a multitude of reports and accumulation of data. This will include financial statements (Income Statement, Balance Sheet, Cash Flow Statement), sales reports, purchase histories, bank reconciliations, etc. Now, gathering this information is relatively easy if the business was set up properly in the beginning: business accounts kept separate from personal, using an accounting software package (QuickBooks, PeachTree, Xero), a proper chart of accounts and so forth. If all of this was done, and correct bookkeeping practices are in place, the it is a matter of printing a series of reports.

Not having a properly set-up business can result on having to conduct a rebuild of historical data which can be difficult, time consuming and very expensive. The pain involved in this process is going to be a direct function of time and volume. How long has the business been operating? How many transaction a month are being processed? And if you want good historical data which will give you a clear picture of the business you cannot take shortcuts with this process. Summarized monthly entries cannot give you important data like customer and vendor concentrations, labor issues or job costs. Every transaction needs to be entered.

Once you have the data accumulated and the reports run it is vitally important you review and understand what you have. Financial statements are a critical tool for running a successful business and knowing your history is critical to planning your future. You cannot project future gross profits of 50% if you have traditionally only run 40%. How do you justify a 35% annual increase in sales when you have never had more than 15% in one year?

Whether you are preparing historical data for an internal business plan, a bank or an investor, it is critically important that it be accurate and that you understand what you are presenting. A Proper Plan is not going to come together without some reference to what has already happened. Know your history and you can plan your future. And do not try and do it all yourself. Either hire a qualified bookkeeper or contract with a reputable outsourced bookkeeping company. Your job is to run a company, let someone else take care of the books.