As an entrepreneur, you’re busy working every day to build your business, finding ways to increase awareness, convert prospects to sales, while managing the infrastructure of your small business.
Unless you’re a financial whiz, it’s not always easy to work on your financial plan and pin down important business management numbers like breakeven, cost of goods sold, return on investment and profit margin. Even if you are a financial whiz, you can get bogged down in marketing, sales and operations and put off focusing on accurate financial analysis.
I often find many small business owners suffering from numbers shame. This is a condition that comes from only focusing on the checking account, instead of profitability and sustainability via financial forecasting.
Knowing and embracing your numbers is essential to growing your business. It provides a map to show where you are trying to go and what it will take to get there. It can also reassure investors, employees and yourself that you thought things through, did your research and have a realistic view of what your business needs.
This is especially true for a new business. Until you’re a year into running your business, it’s easy to underestimate monthly expenses. For example, if you make a product, you also have to package it. If you need a car or truck for business, you also need auto insurance. Often, entrepreneurs who have employees factor in wages but forget about payroll withholdings, like Social Security, Medicare, unemployment insurance, and income-tax.
Then there’s the cash flow challenge. Growing a business requires a capital investment, and often small-business owners don’t secure enough financing when they start out. Bootstrapping can only get you so far – you need cash to grow a business.
Entrepreneurs are routinely too optimistic about how quickly sales will build and how soon their business will reach and sustain profitability. They often mistakenly believe that as soon as they close a sale they’ll have money. They forget that people won’t pay for 30 or 60 days and might be late.
Another challenge for new and early stage businesses is arriving at a price for a product or service based on assumed costs and margins. This approach is typically too simplistic and ignores important factors like market position and the real value of your product.
In addition, Entrepreneurs often don’t distinguish between fixed costs, such as rent and utilities, and variable costs such as workers, materials, packing and shipping. As a result, they wrongly assume all their costs will stay steady as their sales grow, and they plan for their profit margin to widen much faster than is realistic.
Finally, Entrepreneurs leave a salary for themselves out of all the financial projections. Initially you may choose to not pay yourself as a form of capital infusion. However, business owners who don’t write in a target salary for themselves are keeping their expenses and break-even point artificially low.
Remember: No one else would run your business for free, so you shouldn’t, either.
This is why a 12 Month Cash Flow Projection is a key forecasting tool for your business. It provides you with a constant barometer check on your profitability and where you need to make adjustments in your overhead and marketing strategy.
Unfortunately, most Entrepreneurs dread building financial models, as the process is rarely laid out in an easy-to-follow format. Here’s how I help my clients embrace their numbers with grace and ease.
Using a dynamic spreadsheet,* you can identify every single expense and revenue item. Then you determine how much you need to sell to reach breakeven and the profit margin on all products and services. Then you review each expense item to make sure it’s necessary at this point in time, and add them to the model. Next, you build assumptions around your revenue model and expenses. Finally, you allocate profit, taxes and salary before expenses, providing a clear pathway and strategy to a profitable, sustainable business.
This financial forecasting tool process is life changing for business owners. It gives them a sense of control and clarity they are often missing by focusing only on the checking account and their accountant’s monthly or annual financial statements. From an entrepreneurial point of view, you nail down the numbers while seeking all the possibilities for your business. It’s an Andelicious, cash flow positive experience!
Are you ready to embrace your numbers?
© 2015 Ande Lyons
*Projections should always be built using a dynamic spreadsheet. By this I mean that if I change one number or one assumption in the spreadsheet, any other numbers that would be affected will automatically change as well. This allows you to easily scale down or up your revenue/expense growth projections.