If you’re like me, you’re intensely tired of politicians who claim that a simple tweak of government policy will change our economic picture and establish some kind of financial juggernaut. That’s just not reality.
If you look at the data, you realize:
1) Small businesses have generated over 65% of the net new jobs since 1995
2) Over 50% of the working population (120 million individuals) works in a small business
And there is more, of course.
It’s my belief that the small business owner is (still) the best hope for economic renewal in our country — far more than any political entity (presidential or otherwise).
The work of moving our economy forward is *part* of what you are already doing. So don’t let the politicians take the credit.
But I’ve found that too many small business owners are neglecting a very critical piece of their puzzle, and as such are hampering their growth (and our economy’s!) …
Let’s start fixing that, shall we?
Cash Is King For Newtown Square, PA Businesses
“The truth is more important than the facts.” -Frank Lloyd Wright
If I’ve learned anything by watching hundreds of businesses succeed and fail during the course of running my business, it’s this: The lifeblood of any business is its ability to collect cash and pay bills as well as pay its employees, particularly its owners.
However, many, small businesses are profitable on paper, but they do not have enough operating capital to meet their current needs. Consequently, they may be forced to sell out to a stronger competitor, sell a portion of the company to investors at an undesirable price, or close the doors and put the company out of business. None of these alternatives are typically what the owners intended when they started their business.
They’re working without a map, and as they say: cash is king. Not knowing how to plan for it could be killing your business.
Any cash forecast prepared by the management of the company or an outside consultant can be no more than a guess as to when your customers will pay. It is a little easier to forecast when your business obligations are due, but many variables interfere here as well. Hopefully, the more effort that is put into cash forecasting, the better will be the educated guess and the more accurate the resulting picture of the future operations of your business.
Starting the Analysis
One of the most significant factors to be considered in your cash flow forecast is the volume of sales which you’ll generate. Your sales forecast must be as finely-tuned as possible, and the method you use is critically important.
Top-down forecasting is usually dangerous. This involves assuming that there is a certain gross sales potential, say a million dollars, for your product in your area, and guessing you will be able to capture a specified percent of it. As rough as this kind of analysis might be, it is better than not making a forecast at all.
Bottoms-up forecasting is better, but takes more work. You actually count the number of possible buyers of your product in your market area, and estimate how much of your product/service each of them is likely to purchase each year.
A sales forecast needs to be based upon specific facts as much as possible. These facts might include your own sales history, or the history of similar businesses in the area. It is also extremely valuable to determine what has been the experience of similar operations in your market niche in other parts of the country.
Other issues should be addressed: adding new product lines, deleting unprofitable operations, assigning new salespeople, getting rid of ones that aren’t producing to quota. In preparing a forecast, you must also take into consideration items such as the seasonality of your business, the relative state of the economy and the period over which you will forecast.
Obviously your ability to forecast sales for the next month is better than it is for three to five years from now. The amount of detail which must be included in the cash forecast is really a matter of preference. It can be based on per-units sales extended out by the sales price of each type of unit or an average sales volume per day, week or month.
I’ll have further thoughts on this subject next week…
Feel very free forward this article to a Newtown Square, PA business associate or client you know who could benefit from our assistance — or simply send them our way? While these particular articles usually relate to business strategy, as you know, we specialize in tax preparation and planning for Newtown Square, PA families and business owners. And we always make room for referrals from trusted sources like you.
Warmly,
Stephen Venuti
610-353-0686
Stephen J. Venuti, CPA, MST, LLC
