Taking Control: Managing Your Business Finances
For many women business owners, it’s common to be focused on mission, vision, product delivery, and sales and marketing. All too often, business owners treat their business finances as an afterthought, and relegated to a bookkeeper, accountant, or family member.
Every day, I help business owners take control of their finances by implementing simple and easy-to-use financial management systems customized to their businesses. What excites me most about what I do is helping owners position their businesses for growth by properly structuring - and thus allowing them to confidently manage - their 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, direct the finance and accounting staff, and intelligently question the professionals making strategic financial decisions.
Below are a few tips to create a good financial structure for your business. I suggest you use the information to direct your financial staff. Review and ask questions every step of the way, but don’t do it yourself. The idea is for you to be able to take control and manage yourself – not to do it yourself!
Create an objective assessment of current status.
You will need to assemble:
- Most recent financial reports – Profit & Loss & Balance Sheet. Use the most recent completed report you have, even if it’s 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 here.
Create a spreadsheet as follows:
- Show the figures (P & L first, Balance Sheet below) laid out with time periods across the top (i.e. Two 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 Percentages column 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%. Total Liabilities and Stockholder’s Equity is also 100%. In the Assets section, calculate the percentage for each line item to Total Assets, and then do the same for Total Liabilities.
- Review the worksheet, paying attention to the percentages. 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, and 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%.)
Now, you can determine objectively where you stand compared to your industry for: Cost of Goods Sold, Gross Profit, Operating Expenses, Net Profit Before Taxes, Cash, Accounts Receivable, Current Assets, Fixed Assets, Accounts Payable, Notes Payable, Current Liabilities, Total Liabilities, and Stockholders Equity.
To create a vision of where you want to be three years from now, you will need to consider your mission and 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 someone whose mission and vision require them 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 personal goal of what you want the percentage to be in your business).
- Apply the desired percentages to the Desired, Revenues, Expenses, and Net Profit for each of the years.
- Download an Assessment Spreadsheet Sample.
Now, consider what each line item in these scenarios would mean to your business.
[Related: What’s at Stake When We Don’t Talk Money]
The strategic planning process.
This is the hard part. Consider:
- To achieve a desired level of revenue: How does it 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 will 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 you deliver to your customers, you will be able to weed out strategies that you are unhappy with from the ones you believe are actually doable.
- You will also create another worksheet for cash flow and 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 can 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 to consider and vet further before making a commitment.
Committing to a strategic financial plan and structure.
Vetting your final three strategies and committing to one is the last step. Here, you will involve the managers and perhaps staff of respective departments to consider all the changes necessary for each of your three strategies. Get their input and adjust each strategy accordingly.
Take the revised figures for each of the three strategies and compare those figures to 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 how to go about securing that capital.
Create anticipated time-based milestones. Implement your new strategy. Monitor results weekly and monthly, and refine and adjust along the way. A friend of mine has a saying, “Simplicity on the far side of complexity." Once you’ve implemented this system in your business’s financial management process, you will experience the meaning of simplicity on the far side of complexity.
You can find a worksheet to help you with this process here.
Marilyn Magett works with rapidly-growing women-owned businesses to create financial structures that support continued growth, optimize cash flow and profitability, and build wealth. She designs and implements customized, integrated, strategic financial management systems.
Have more questions? Follow up with the expert herself.
Consulting CFO & Financial Strategist
CRS Financial Management Solutions
I work with women business owners who are feeling stressed, frustrated, or stuck, or who are just not growing as fast as they would like to understand why that’s happening to them, and then I give them a proven process that helps them to immediately generate more cash flow, more profitability, and attract the capital they need to grow their businesses with confidence and ease.” Are you desperately trying to generate or create fast access... Continue Reading
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