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.