Preparing for the end-of-year wrap-up (or frankly any time, but why not now?) is a great time to take stock of your business. Naturally, you want to do everything you possibly can to ensure the survival and growth of your company. One of the greatest skills you bring to the table is the understanding, tracking, and use of numbers to manage your business.
Although you may feel you aren’t good at math, or don’t know accounting, or can’t figure out the computer — you are probably selling yourself short. Anybody can work with numbers and the kind of number tracking you need to do here is not magic. And you are the expert on your business. Nobody else is as motivated or informed as you are to get the numbers working for your business.
First, get a financial snapshot of your business.
This should be simple. It is meant to be easy to prepare and able to be digested by you in no more than five minutes. The point is to get the quickest possible handle on key aspects of your operations. You may decide that a monthly snapshot is adequate; some owners want to see this on a weekly basis. It is used to determine your cash reserves, your accounts receivable status, inventory levels and to compare trends. The financial snapshot should include the following categories: Current Assets, Inventory, Current Liabilities, Fixed Monthly Expenses, Loans Outstanding, Monthly Sales to date, and Yearly Sales to date.
Second, cash flow statements that are regularly updated.
Projecting cash flow is one of the most important ways you can use numbers to manage and grow your business. As you begin this exercise, keep an Assumptions Sheet on which you list all the assumptions you used to develop your numbers. This way the numbers will have meaning and you will know how you got them.
Next, project your monthly sales for a full year. From these projections, deduct your monthly expenses. You can divide expenses between fixed (same every month) and variable (those that change with volume of sales). The balance is the monthly operations. To that you will add the monthly cumulative cash position (it looks very much like your checkbook) adding last month’s balance and determining the next month’s beginning balance. To this projected cash flow, you will compare actual numbers and determine where you stand in relationship to your plan.
Third, conduct a cost analysis of your product/service.
Understanding the cost of selling your product/service is critical to understanding the cash position of your business. There are many different opinions of what should go into cost of goods sold, and each business will vary — the important thing is to be consistent and to include those costs that are directly related to the expense of selling. What is “left over” is the contribution margin to pay the fixed cost of doing business, and after that your profit.