3 Ways Finances Can Help Different SMB AreasWritten by Irakli on July 01, 2019
What’s the most important goal for a small to medium-sized business?
Profit? Money? More clients? Scaling up?
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While those certainly are things all SMBs want to achieve, it’s the finance part that drives businesses.
Finance is the means to an end. While the end depends on what you’re trying to accomplish.
While money is not the end goal (or shouldn’t be anyway), it’s how you get there that matters.
And in most cases, your financial operations end up being the deciding factor if your business will fail or not.
Failure to keep track of finances is the most common reason why so many small businesses and startups fail. If you don’t keep careful track of your net income and other important financial statements, you risk getting into debt, which might snowball out of hand.
Moreover, keeping track of your finances can also tell you a lot about your company. If you’ve ever wanted to gain an accurate overview of your business – start with your finances. It can help you track and analyze your overall business status and how to continue.
In turn, you can use the valuable insights from the financial data as a way to determine how to continue operating. There’s a lot of details in there that are important you utilize to the fullest.
All this to say, your finances can say a lot about your company. And the following is just a few of the many ways finance can help your business.
1. Business forecasting
Telling the future is not easy. But at least with finances, you have something to base it on.
Planning ahead is an essential part of finance. And it’s also an essential skill if you want your business to succeed.
In order to pull off an accurate financial forecast for a small-business, you should develop a set of projected financial statements. And this is where the pro forma financial statement comes in.
The pro forma financial statement is based on assumptions and projections to help forecast future financial levels and growths.
For a business wanting to see the effects of three different financial options – they can prepare a projected income statement, cash budget, and finally, a pro forma balance sheet These three projected financial statements are referred to as pro forma financial statements.
Each of them play an important piece in being able to successfuly forecast your financial future. In order to prepare a comprehensive financial plan, the best method is to first start with a pro forma financial statement.
The pro forma income statement provides a projection of how much profit the business should expect over a specific time period. among other things.
To successfully develop a pro forma income statement, the owner should:
- Establish a sales projection as a starting point.
- Set up a production schedule to calculate the cost of goods sold (if dealing with physical products, otherwise, place a value on the specific service).
- Calculate other expenses that become subtracted from sales (general and administrative expenses, taxes, dividends, and interest expenses).
- Determine unexpected profit (gross profit estimate).
After that, cash budgets are done on a monthly basis. They follow a structure similar to the cash flow statement but also calculate the net cash flow.
And finally, the pro forma balance sheet shows the total change inside the business over time. Ideally, the owner also needs information from the last year’s balance sheet as the amount of each line item on the sheet can be obtained from one of the three documents.
2. Strategic planning and budgeting
If you want to have a successful business, you need to have a great and an appropriate budget.
Almost every business has (or should have) some kind of an overarching vision and a goal. The budget is a roadmap as to how you’ll get there.
You define where you want your business to go, determine the objectives and then figure out how much it’ll cost to get there from a financial perspective.
These plans form the foundation for hiring employees, capital spending, marketing campaigns, and eventually – scaling up.
Financial forecasts are there to assist you in meeting your future business goals. They’re a prediction, based on your current circumstances (how you manage your cash flow, for example) and can provide accurate results and progress.
But with that said, planning ahead for the future can be hard – especially if you’re just starting out as a business.
If that’s the case, start small.
Budgeting is the most effective way to control your cash flow, allowing you to invest in new ventures at the right opportunity.
With a good budget plan, you’ll be able to:
- Control your current and future financial situation.
- Ensure you can continue your current operational activities.
- Be confident in your financial decisions and meeting your objectives.
- Ensure you have enough money for future investments and projects.
When creating a budget, you should take a long look at your current financial numbers to get an overview of where your business is heading.
Can you improve your day-to-day operational activities? What’s your value proposition as a business? What’s the smartest way to fund your activities?
These questions can help you get a solid overview of your business and the status it is in.
If you want to grow as a business, you need to take a good hard look at all aspects of your business. Even if they’re not necessarily related to finances, your business activities can have a direct impact on your costs and expenses.
So, it’s worth keeping an eye out for all other things that might affect your budget and finances.
3. Profit planning and cost control
Finally, this is what it all comes down to: profit planning and cost control.
To put it simply, if you want to survive as a business, you need to be earning more than you’re spending while minimizing the costs.
Easier said than done, right?
SMB owners are constantly going over their financial statements, looking for any expenses and details that can change their budgeting situations.
It’s really important to know what you’re looking for, especially if you’re just starting out. As mentioned above, there are many details (both financial and nonfinancial) that can affect your cash flow. And even if you know what costs you’ll be facing, it can be difficult to estimate exactly how much those costs will be.
So, to get a sense of the bigger picture, begin with your starting costs. These are the costs that determine whether you can bootstrap or if you’ll need outside funding.
Meanwhile, for existing companies that already have financial results, projections begin with the expected ending balance of the previous period. But for startups, it’s all about the starting costs.
Breaking down the items and the assets you’ll be dealing with in terms of costs makes your educated guess a lot easier. But for the most part, if you’re still not sure what you’re getting yourself into, what you can do is overestimate costs.
It’s better to overestimate than to underestimate when it comes to finances.
You can never be too sure. So, better be safe than sorry. Adding 10% on top of your total costs to cover any unexpected expenses is a great way to play it safe.
Putting it all to practice
One of the biggest mistakes SMB owners often make is looking at their business plan only once a year or so, and making little to no changes. They make sure it’s up to date, continue operating like normal, and forget about it until the next fiscal period.
Though there is no golden rule that says how often you should be making changes to your business plan, it’s essential you realize just how important your business plan is.
If you sit down and go over your business plan once or twice a month to plug in the numbers in the profit and loss statement – you can then compare those numbers with future projections. And then use that comparison to revise projections for the future.
You don’t have to go through a complete financial analysis every month, but if you want to make proper business forecasts, you should know where to look.
Comparing financial statements overtime is a great way to get an accurate look into the future. And then you can budget accordingly, based on the profit and costs.
Managing a business is risky and complicated, yes. Especially on the finance side of things. But it’s an essential step nonetheless, especially if you want to make it far as a business.
And in business, strategy is everything.
So, you shouldn’t shy away from using financial data every day when making a decision. You can use your finances to analyze the present and project the future. Without the benefits of financial analysis, continuing to operate becomes difficult to say the least.