Taking Control – Managing Your Own Business Finances

Taking Control – Managing Your Own Business Finances

It’s been my experience that for many women business owners, it’s common to be focused on the mission, the vision, the delivery of the product or service, and the sales and marketing.  All too often business owners treat their business finances as an afterthought.  They focus on the mission of the business, the product or service itself, and the sales and marketing.  The business finances too often are relegated to a bookkeeper, an accountant, or a family member.

Every day I help business owners take control of their business finances by implementing a simple and easy to use financial management system that has been customized to that business.

But what excites me most about what I do is that I help business owners to position their business for growth by properly structuring their business finances allowing them to confidently manage their own business finances.  They no longer have rely on the expertise (or lack of expertise) of their bookkeeper, accountant, or tax prep CPA.

Having a predesigned financial structure in place makes it possible to always be in control, to be able to direct the finance and accounting staff, and to intelligently question the financial professionals in making strategic financial decisions.

Below are a few tips on how to create a good financial structure for your business.  I suggest you use the information presented to direct your financial/accounting staff.   Review and ask questions every step of the way – but don’t do it yourself.  The idea here is for you to be able to take control and manage yourself– not to do it yourself!

1. An Objective Assessment of Current Status

For this you will need to assemble:

• Most recent financial reports – Profit & Loss & Balance Sheet (for the current year to date period. Use the most recent completed report.  Do not decide that the reports for last month are not ready and so you have to wait.  Use the most recent completed report you have even if it’s a from two or three months ago.
• Same reports for the end of the previous two years – Profit & Loss & Balance Sheets.
• Financial Ratios & Statistics for your industry – based on your NAICS code. You can get this by going to http://www.bizstats.com/

Create a spreadsheet (excel or google sheets) as follows:

• Show the figures (P & L first, Balance Sheet below) and is laid out with the time periods across the top (ie 2 years ago, last year, current year to date, current year to date annualized. Use the year to date for the current year and annualize the figures in the next column. No need to annualize the Balance Sheet.
• Next to each year place a column for percentages and Calculate the percentages: On the P & L Sales will be 100% and all the other line items will be a percentage of sales.  On the Balance Sheet Total Assets is 100%. And Total Liabilities and Stockholder’s Equity is also 100%.  In the assets section calculate the percentage for each line item to total assets and do the same for total liabilities.
• Review the worksheet so far paying attention to the percentages going across the worksheet. Create an average Percentage Column and put in the average for the two historical years and the current annualized (forecasted) year.
• In the next column put the industry statistics from the industry reports for a minimum of the following items: Sales, Cost of Goods Sold (or Cost of Sales), Gross Profit, Operating Expenses, Net Profit before taxes.
• In the next column compare the average percentage to the industry percentage for each line item and show the differences. Label this column variance. (Example, the cash line item average for all three periods is 12%. The industry stats line item for cash is 15%.  The variance column for cash will show -3% (yes that is minus 3%).

Now you can determine objectively where you stand compared to your industry for the major areas: Cost of Goods Sold, Gross Profit, Operating Expenses, Net Profit before taxes and Cash, Accounts Receivable, Current Assets, Fixed Assets. Accounts Payable, Notes Payable, Current Liabilities, Total Liabilities, Stockholders Equity.

2. Your Vision, where do you want to be in the next 2 – 3 years

To create a vision of where you want to be 3 years from now, you will need to consider your mission, and your vision together.  If you have a mission that is focused on serving as many people as possible, but minimizes the importance of profits you will likely create a different plan than if your mission and vision require you to create a specific level of profitability and serve as many people as possible within that constraint.

• Using the spreadsheet you created for the objective assessment, create additional columns for the balance of the current year, next year, the second year, and the third year. Call these columns “Projected”
• Fill in figures based on the hierarchy of your goals. If your goal is a specific amount of profit, fill in those figures first.  If your goal is a specific amount of revenue, fill that in first.
• Next to each year’s column make a column for percentages and fill in your goal percentages based on your analysis (comparison to industry, and decision as to what you would want the percentage to be in your business).
• Apply the desired percentages to the desired, revenues, expenses, net profit for each of the years.
• Use this link to download an Assessment Spreadsheet Sample.

Now, consider what each line item in these scenarios would mean to your business.

3. The Strategic Planning Process

This is the hard part.  Consider:

• To achieve a desired level of revenue – how does that change your operating expenses (will you need more space, more personnel, different personnel). Will you be able to increase your revenues but decrease the cost of goods sold for each sale.  Will you need to invest in additional fixed assets.
• For each year, consider all the changes that would be necessary and reflect those changes in the projected figures for that year. Once you know what the changes are, and how those changes will impact your business and the product/service you deliver to your customer, you will begin to be able to weed out the strategies that you are not happy with and the ones that you believe are actually doable.
• Here you will also create another worksheet for cash flow and you will show beginning cash, receipts, disbursements, and ending cash by period (minimum of monthly). If this projection shows that you will run out of cash or your cash balance will be less than your required minimum cash balance, you will be able to determine how much additional working capital is required and when. Include this in your plan for implementation.

You should end with at least three different strategies that you will consider and vet further before making a commitment.

4. Committing to a Strategic Financial Plan & Structure

Vetting your final three strategies and selecting one to commit to is this last step.  Here, you will involve the managers and perhaps staff of the respective departments to consider all the changes necessary for each of the three strategies. Get their input and adjust each strategy accordingly.

Compare the revised figures for each of the three strategies and compare those revised figures to both the industry statistics and your current averages.

Consider again the viability of each of the three strategies. Select one you are willing to commit to.  Determine if you will need additional working capital and determine how to go about securing that working capital.

Create anticipated time-based milestones. Implement your new strategy.

Monitor results weekly and monthly and refine and adjust along the way.

I have a friend who uses an expression I wish I had thought of – “simplicity on the far side of complexity”.  Once you’ve implemented this system in your business’ financial management process – you will experience the meaning of simplicity on the far side of complexity.

Due to several requests, I have added a worksheet template to help you get started with the process.  You can find the worksheet here.

About Marilyn J. Magett

Marilyn Magett is passionate about helping Women Business Owners to proactively manage their business finances.  Her mission is to help other WBE’s feel that they are confidently able to manage their own business finances so they can grow their businesses.

CRS Financial Management Solutions, is motivated by Marilyn’s point of view regarding the financial management process for small and mid-sized businesses.  Business owners are consistently counseled to pay attention to historical financial reports as their main management tool.  But these reports in isolation do little to help drive the business forward.  A bit like staring out of the rear-view mirror while driving to a destination ahead of you.

Businesses that proactively manage their finances use a system that consistently plans, forecasts, and measures actual results against that plan.  Every day we use our personal GPS systems to help us drive from where we are to where we want to go.

In Marilyn’s opinion, the right financial structure for your business incorporates the same principles.  Implementing the right financial management strategies and structures into your daily business operations in a meaningful way can only contribute to the business’ success.

While based in San Diego, Marilyn spends most of her time working from her second home in Jamaica which she shares with her Jamaican husband and her US boyfriend – a Lhasa Apso named Cory.  She works exclusively with US based businesses and stays in touch with her clients through videoconferencing, video emails, and attending regional and national conferences in the US several times a year.