November 15, 2016

Finance 101: 3 great accounting tools every business needs

Forecasting, budgets, and financial goals — Why bother? Similar to climbing a mountain, a business owner needs to understand the route, the risk, and the reward. A good plan is necessary to tackle the highest peaks and reach the summit of success.

It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts. — Arthur Conan Doyle

Data drives decisions. I might end up writing this a thousand times… but you first need to have some useful data before arriving at a conclusion. I want you to understand the difference between a forecast, a budget, and a financial goal.

First, you need to create a forecast. A forecast is an exercise in identifying where the business is going based on current and historical trends. For example, a non-cyclical business averaging $10,000 a month for the first 6 months of a year is forecasted to do $120,000 in gross revenues. Sit down and review your financial statements. If you need to… create a straight-line graph of the big category numbers, e.g. Gross Revenue, Cost of Goods/Services, and Operating Expenses. Simply take a ruler and try average those trend lines out a whole year from today. See where you end up. Do you have sufficient revenue to cover the expenses? Are you trending upwards across all fronts or are your expenditures growing quicker than revenues?

Next, you need to formulate a budget. A budget creates limits around potential and expected expenditures within a certain time period. Ultimately, a budget is used to control spending habits and ensure that the different areas of a business receive appropriate funding. Using your historical data and your forecast, can you limit your expenses in certain areas and still achieve the same gross revenues? Can you improve the bottom line at a greater rate by reducing certain expenses?

Lastly, and most importantly, you need to create a goal. A financial goal is how we move forward. This is not just an exercise in accounting. It is the creation of a plan to guide the strategy of business. Goals need to be defined and measurable. Most importantly goals need to be attainable. Financial goals are not based on historical or current trends, they are indicators of the changes in strategy or direction of a company. Your goals are used to motivate and define the size of the mountain you are climbing.

So grab a piece of paper and a pen your laptop, sit down by yourself, or with your financial team, and work the numbers to understand where you are at and where you are headed. Create a written financial goal. Remember:

If you fail to plan, you are planning to fail. — Benjamin Franklin