3 Keys to Turn Your Financial Budget into a Financial Forecast

/in , , , /by

We are coming to the end of the quarter.

So how did your Company do?

At New Economy, we hit our measurables of revenue of $614K, gross profit of 50%, and net profit of 12%. 

Also, we hit 80% of our rocks. These are the top priorities for us in the quarter.

What did you learn?

At New Economy, we learned a lot. 

financial forecast

We learned that we need to keep making financial investments in our team members through training and growth opportunities. 

We also learned we need to increase our financial investments in marketing to help let entrepreneurs know we are here to help them gain control of their finances to make smart decisions.

But what do we do with these learnings from a financial perspective?

At New Economy, we believe you can use this information to forecast for the next quarter.

For a bit of background on creating a budget, check out our blog posting Here.

Your financial budget is set for the and will not change. 

However, your financial forecast can change based on what you have learned.

In this article, you will learn about: 

  1. The difference between a financial budget and a financial forecast
  2. When and why to update your financial forecast 
  3. Top 3 Takeaways

Let’s dive in.

The Difference Between a Financial Budget and a Financial Forecast

Most Companies, including New Economy, perform their financial budgeting towards the end of the year. 

Being a December year-end, we typically begin the process in November and wrap up in the first week of January.

The financial budget is the goalpost – think football and field goalposts. You are aiming to kick the ball through the goalposts to score. Or from a financial point of view, achieve the budget which keeps you on the path to achieving your overall goals.

You are estimating things like the investments you need to make into the business that will get allocated to hiring, marketing, and operating expenses. 

Further, you are determining your revenue goals and the direct costs to support that revenue.

It is your best guess.

You are painting the financial road map month to month to help you achieve your annual financial goals.

It’s important to note that your budget should not change.

You don’t want to move the goalposts.

We call that cheating 🙂

However, there is another very helpful tool.

It is your financial forecast. 

Your financial forecast is identical to your budget. It is set up the same way, looks the same and even works the same.

The biggest difference is you can change your financial forecast. 

In fact, at New Economy, we are constantly changing our forecast. 

But we are also continuously lining up the financial forecast against the financial budget. 

The idea is the financial forecast is updated for what is happening in the business, and in our experience that is lots of change.

At the end of the day, we hold ourselves accountable to the financial budget that was set and use the financial forecast as the real-time road map to get to the intended destination.

It’s kind of like the direction app, Waze.

You enter your destination and ways will give you the directions to get to your destination. This is like your financial budget.

However, then an accident happens. 

Waze then recalibrates and provides an alternate route. There are changes but it will still get you to the original destination. This is like your financial projection.

So, we suggest you make sure you have a financial budget.

Then modify that budget by bringing it alive based on changes or real-time information and call that your financial forecast.

In the next section, we will talk about when and why to update your financial forecast.

When and Why to Update Your Financial Forecast

When to change your forecast 

By now you should know the difference between a financial budget and a forecast.

The next question is when do we update the financial forecast?

There is a wide range of answers to this question depending on:

  • The business
  • The visibility required
  • The investment of time that’s willing to be made 

We have some customers that re-forecast weekly. 

They have built a weekly process around this and have determined that weekly forecasting gives them real-time insights that they need to manage the business.

We have some customers that re-forecast monthly or even quarterly. 

They will access real-time changes but more so look at monthly budget versus actual information. When items are on and off track, they will trigger changes to the model.

At New Economy, we re-forecast weekly. 

We have created a simple process where all the department leaders provide any material changes. It takes us about 15 minutes per week to do this and we will discuss why we do it this way in a bit.

In any case, updating on a weekly, monthly, or quarterly basis you are on the right track. 

You need to turn your budget into a forecast applying what you have learned.

Why change your forecast 

One of our taglines is we help entrepreneurs gain control of their finances to make smart decisions to build and grow their businesses.

To make smart decisions you need timely and accurate financial information like a financial forecast.

The forecast gives you the most accurate picture of how your business is performing from a financial perspective at any point in time.

Having that timely and accurate financial information allows you to do the following:

  • Determine if you are on or off track to your budget
  • Identify areas of opportunity or improvement
  • Run decision-making scenarios that show the financial impact

The reason New Economy updates the forecast weekly is to have good data for our weekly Leadership Team meeting called our Level 10 meeting. 

As part of that weekly Level 10 Meeting, we review a weekly, monthly, and quarterly scorecard which has the financial data we’re measuring. 

And you guessed it, one of the sources of that data is our financial forecast.

One last thing to note on the financial forecast.

Once a month has closed, we drop the actuals into the forecast. Refer to more information on the financial close here.

For example, if we are through Q-1, the months of January, February, and March would have actual results in the financial forecast. The remaining nine months would be the projected results.  

And we continuously analyze the financial forecast against the original budget.

A financial budget and financial forecast are very powerful business tools. So don’t sleep on the importance of implementing them into your business.

3 Key Takeaways

At New Economy, we want to help you gain control of your finances to make smart decisions. Part of that is understanding your finances and how to drive business performance.

Here are 3 key takeaways.

  1. Make sure you have a budget in place. Don’t change the budget once you set it. And build the budget showing details such as monthly and by-line items.
  2. Make sure you transition your budget into a forecast. Your forecast can be updated weekly, monthly, or quarterly. It can be changed and should be compared back to the budget.
  3. Leverage these tools in your business. They are powerful tools to help you achieve your business goals.

There you have it 🙂

financial forecast

New Economy Team Members are Experts in Accounting for Entrepreneurs

If identifying ways to decrease your taxes is not in your skill set or you want to gain control of your finances to make smart decisions to build and grow your business, New Economy is an excellent partner. 

We’ll help you get your accounting and taxes done, and done right.

Schedule a time to meet with our Founder, Jeff, and discuss how we can add value to your situation.

Creating a Small Business Budget

/in , , /by

A small business budget is like a treasure map. Yup, you heard that correctly. Just think of Jack Sparrow in the Pirates of the Caribbean.

Many entrepreneurs and business owners can communicate where they want to be at some point down the road. For many, that is obtaining the treasure i.e. achieving goals and financial measurables. 

But they struggle with how they are going to get there.

That’s where creating a small business budget comes into play. Think of your small business budget as the map to provide the steps to obtaining your treasure.

At New Economy, we believe in one-year, three-year, and 5-year budgets, and as we are entering into the fall, now is the time to start thinking about your budget again. As much as we love the three-year plan, this article is focused on the one-year plan.

We want to help you gain control of your finances to make smart decisions to build and grow your Company. 

 

Small Business Budget

In this article, you will learn about: 

  1. How to get started on preparing your one-year small business year budget
  2. Best practices in creating your one-year small business budget
  3. Utilizing your one-year small business budget to obtain your treasure
  4. 3 key takeaways

Let’s dive in.

How to Start Preparing Your One-Year Small Business Budget.

You might be surprised, but some of the most important parts of creating a budget have nothing to do with numbers or spreadsheets. The first part of creating a budget requires stepping back and obtaining a deep understanding of the business.

Understanding the Business

At New Economy, before we prepare a one-year budget, we spend time getting to know the business. This requires meeting with key team members like the Visionary/CEO, Integrator/COO, Operations, and Sales team leaders in an effort to gather as much knowledge as possible about the business. 

We do this because we seek to understand. We want to be able to offer up best practices and strategies to help you get closer to achieving your goals. And without historical context, an understanding of the present moment, and the future vision it is difficult to predict.

Here are some of the things we seek to obtain and understand and what you should too if you are preparing your own budget:

  • Review existing business and financial information like historical financial statements, tax returns, and business plans.
  • Review and understand unit economics. For example, the cost of making your product or service.
  • Review pricing strategies.
  • Understand management’s vision, growth, and exit plan for the business.
  • Get a sense of the resources needed to achieve the vision. Think people, equipment, technology, and so forth.
  • Understand the finances and capital in place to support the business.
  • Understand the sales and marketing process and review all collateral.
  • Understand the issues and challenges the business is facing.
  • Get a sense of the overall market conditions and opportunities in the specific industry.
  • Review key documents like customer agreements, employee agreements, and bank documents.

It seems like a lot and it is, but it’s important. We typically have a few sessions to do these knowledge and data transfers.

By reviewing all of this information, we are able to obtain a baseline understanding of the business and the direction that management is looking to go. We use this as the foundation for building a one-year small business budget. So don’t rush through, take your time and seek to understand. Soon, you’ll have what you need to create the map that leads to your treasure.

Best Practices For Creating Your One-Year Small Business Budget

Okay, now we are ready to get started.

Tools and Technology

There are many forecasting tools out there, and we are big fans of leveraging technology. This allows for automation, reduction of errors, and possibly some time savings.

A few forecasting tools to check out are:

  • Jirav
  • Spotlight
  • Fathom

However, at New Economy, we tend to gravitate towards either Excel or Google Sheets. We find they allow us to customize the levers and unit economics and inputs specifically to your business. In other words, we have extreme flexibility when building out the budget.

There is no wrong answer here, but staying consistent with a single tool is the best route.

General Framework

At New Economy, we build our budgets much like your historical financial statements. So our budgets encompass three financial statements:

  • The Balance sheet
  • Profit and loss statement
  • Statement of cash flows

You’ll need this to produce budget versus actual information but more on that later.

When building out financial statements, we take a detailed approach and use the chart of accounts in your financial statements to build the budget. Yup, we do it line item by line item based on each account so we create variance reporting at month end.

Further, we build out the financial statements by month. So each financial statement will have monthly balances. The end product is a Balance Sheet, Profit and Loss statement, and statement of cash flows that mirrors your financial statement accounts and is produced by month.

Input Sheets

Next, we move into the input sheets. These sheets are the drivers, the levers that feed into the financial statements mentioned above. By setting up input sheets, you are able to run “what if” scenarios and change your assumptions which will ripple throughout your financial statements.

Here are some key examples of input sheets:

  • Staffing Sheet – This sheet represents the team you have and the new hires you will make. You can add new hires, increase compensation, add benefits, and even remove staff. The idea is to show what your team is going to look like over the next 12 months and how much it is going to cost the business. Again, this is done monthly and at a detailed level. 
  • Operating expense Sheet – This sheet represents the general expenses and overhead needed to support your business over the next twelve months. Think about expenses like rent, insurance, software costs, and marketing expenses. These are your fixed costs and the idea is to show how much it is going to cost the business. Again, this is done monthly at a detailed level.
  • Revenue and Cogs Sheet – This sheet represents your revenue and the direct costs to produce that revenue. We like to get very detailed on the revenue side. For instance, as you build this sheet out, think about the economic units. Meaning, can you build this sheet out showing # of units x price per unit to get to sales? This allows you to make different assumptions around growth. On the Cogs side, it is variable with revenue. We do build them from the bottom up and get a sense of the costs needed to produce one unit of revenue. But we also look at it from the top down and look at the overall gross profit margin as a gut check. Again, this is done monthly at a detailed level.

Financial Statements

This is where the magic all comes together. 

You should have a good understanding of the financials since the budgeted financials are just a forward looking picture of the actual financials you review at the end of each month.

In our framework section, we discussed the basic layout as follows:

  • Balance sheet by month
  • Profit and loss sheet by month
  • Cash Flow Statement by month

Your traditional financial statements that give you a sense of how your business is performing from a financial perspective on a month to month basis. And we have both the actual historical financial statements for each month as well as the future oriented budgeted financial statements out into the future.

Your Actual and Budgeted Balance sheet will show all of your assets, liabilities and equity.

Your Actual and Budgeted Profit and loss statement will show all of your revenue and expenses.

Your Actual and Budgeted Cash Flow statement will show you where your sources and uses of cash are coming from.

All of the financial statements in our budgets are linked up to the input sheets. So any changes you make in the input sheets ripple through the financial statements automatically.

We feel it is important to take a detailed approach to budgeting and have your budgeted financial statements mirror your historical actual financial statements which we discuss in the next section.

 

Utilizing Your One-Year Small Business Budget to Obtain Your Treasure

Now that you have a one year budget in place, let’s talk about the ways to use it.

  • Variance reporting  – Variance reporting is something that happens at month end. Once you close the books for a month and have your actual financial statements we review a variance report. This can be system generated from an accounting system like QBO. The value here is understanding which line items are on track or off track against the budget. Then you can assign a team member to look into why and help understand if any necessary changes are needed to get things back on track.
  • What if scenarios  – We often get asked questions like “can we afford to hire?” Or “if we do hire, what is the impact on profitability”? While most entrepreneurs have a pretty good gut answer we prefer to utilize the data. We would run the hire and salary through the staffing tab to see the impact on the profit and loss statement. Then we can answer the question accurately as to the financial impact of that decision. So you can use the budget to get a sense of the financial impact of any decision you are about to make in your business.
  • Reforecasting  – As the months march on we should be learning about the business. We are aiming for the results laid out in the original budget. However, much of the learning we are obtaining may result in some re forecasting. For instance, maybe we want to increase marketing spend above the budget amount because it is resulting in revenues above the budget amount. So you can use the budget to create a reforecast which is simply changing underlying assumptions in the input tabs based on the direction of the business. But be careful, you want to continue to hold yourself accountable to the original budget.

There you have it. We hope the  road map above gets you closer to your treasure.

Here are three key takeaways:

  1. First and foremost, every Company needs a budget. A budget will help you understand the resources needed to chase after your vision. Further,  budget will help you to determine on a month to month basis whether or not you are on track.
  2. Leverage your data to make smart decisions. If you have questions or decisions to make, use your budget to understand the financial implication of those decisions. You now have a tool to help corroborate your “gut” response to decisions.
  3. Turn your budget into a forecast. Every month, you will be gaining new insights into your business. You have the opportunity to apply that learning along with the financial impact by reforecasting your numbers. We suggest doing this on a monthly or quarterly basis. But keep your original budget intact as those are the goal posts for the year.

 

Small Business Budget

New Economy Team Members are Experts in Accounting for Entrepreneurs

If identifying ways to decrease your taxes is not in your skill set or you want to gain control of your finances to make smart decisions to build and grow your business, New Economy is an excellent partner. 

We’ll help you get your accounting and taxes done, and done right.

Schedule a time to meet with our Founder, Jeff, and discuss how we can add value to your situation.

3 Ways to Cut Business Expenses

/in , , /by

As a growth stage entrepreneur, you’re constantly thinking about ways to grow your Company. 

An important thing to consider as you grow is keeping expenses on track. We have learned that growth can suck cash and a big part of that is expense management. 

This begs the question: Do you have an expense management process in place that effectively cuts unnecessary business expenses?

At New Economy,  this is on our minds too.

Why, you ask? 

It aligns with our efforts of helping you gain control of your finances to make smart decisions to build and grow your company. 

In this article, you will learn: 

  • What an expense management process looks like
  • What types of questions to ask when identifying expenses to cut
  • How to actually cut or reduce expenses
  • 3 key takeaways related to cutting business expenses

Let’s dive in.

Cutting business expenses

What is an Expense Management Process?

There are a few important things to discuss here. 

First off, before we get into the process itself we’d like to quickly cover an important financial tool. 

Every business should have a detailed budget. The budget should be prepared monthly and be detailed by line item (Refer to our blog post on top 4 financial tools). In this case, our focus is on the expense line items. If you don’t have this in place, you should. 

Why? You are making important bets and decisions on where you need to invest your resources to achieve your goals. 

Ok, now we can move on to the process which can be achieved at a detailed operational level and at a higher financial level.

Let’s start with the detailed operational level. The benefit here is: 

  •  You are ensuring you are obtaining the proper tax deductions
  •  You are able to manage expenses
  •  You are going to get more insights to budget 
  •  You are minimizing fraud

Every business is different and there are employee expenses such as travel and meals and then business expenses such as inventory purchases and marketing expenses.

Here are a few keys for every business regardless of the type of expense:

  • Have a written policy that is followed by all
  • Keep everyone from employees to managers accountable to the process
  • Ensure the process has built into it proper documentation such as expense reports and purchase orders
  • Ensure the process has proper approval built into it. Meaning, make sure a manager is approving the employee expense report or purchase order

Moving on to the higher financial level. The benefit here is:

  • Having data to make timely decisions
  • Knowing what is on-track or off track
  • Identifying root causes of overspending
  • Fixing problems real-time

Here the process goes back to the budget we discussed. At month’s end, the actual amounts for all expense line items should be compared to the budgeted amounts. All line items should be analyzed to determine what we are learning. 

For instance, if a line item is over in a particular month, why is that? Maybe it’s a timing issue and we had to front-load expenses and no additional action is required. Or maybe, the marketing team has overspent and this needs to be brought to their attention to reduce expenses in a subsequent month to keep things on track.

The key here is to create both types of processes, put someone in charge of managing them, and use the information you are getting to cut business expenses to help you achieve your financial goals.

What Type of Questions Should We Ask When Looking to Cut Expenses?

We believe cutting expenses to achieve your financial goals is both an art and a science. You don’t want to simply cut an expense because it is over your budget. Maybe the expense that is over budget is helping you to achieve your business goals. In that case, why would you cut it?

This leads to our first question. We like to ask: “Does this expense get us closer to achieving our goals?”.

The question is to get you to really think about where you are allocating your capital and get you to prioritize. If the expense is mission critical, then we often advise to proceed with caution and perhaps find other expenses that are not as much of a priority.

Another important question to ask yourself is: “Why is this expense over and above the budget?”.

We have found that getting to the root cause often requires us to go deep. Meaning, we try to ask why at least 5 times to get to the bottom of it. Here is an example.

The marketing budget is over budget for the month by 25% or $15,000 but why:

  • Why 1x – Because the marketing team overspent
  • Why 2x – Because they needed additional support to achieve lead generation
  • Why 3x – Because they underestimated the resources needed
  • Why 4x – Because their original submitted budget was not scrutinized enough
  • Why 5X – Because the process for establishing budgets was not followed

As you can see, as you keep going deeper you get closer and closer to the real why. And by having the real answer you are able to make a smart decision. You can decide to re-forecast and increase the budget over the remainder of the year. Or you can decide to work with the marketing team on staying on budget and lower expectations on lead generation based on the resources deployed. 

Lastly, another favorite question is: “Who is accountable for this expense line item?”. 

We believe that whatever we measure and manage will improve and get better. And part of this is giving responsibility to team members to manage and own the number. 

So back to the example above, we would suggest that the marketing team leader is the person that should be taking ownership of approving the budget for the marketing team. This individual is now responsible for providing thoughts and actionable insights on getting the budget back on track. Never underestimate the power of “who” …..as in, who is responsible and accountable for this.

 

 

How Do We Actually Cut Expenses?

This is a delicate topic. But as your Company is growing, you may find that expenses naturally start to grow. Growth sucks cash in the form of expenses. But cutting expenses is one way to help you stay on track for achieving your business goals.

Here are some tips for cutting expenses:

  • Communicate your “revised vision” with the reduced expenses in the form of a re-forecast to your team. This paints a new picture of what we are aiming for on the expense side. And call out those specific line items and explain the why behind them. The point is, involve your team in this conversation.
  • Have open and honest communication with your vendors. You need your vendors just as much as your team and customers. They are helping to provide the goods and services needed to grow the business. So inform them by communicating timely and clearly so they can plan ahead.
  • Continue to hold managers accountable, ensuring they are driving the change needed to reduce expenses. This should be emphasized as a top priority that needs to follow through based upon an agreed timeline.
  • Keep banging the drum so that your expense management process is followed by all. Let everyone know they can play a role here to ensure the company succeeds.

So as you can see, there is no silver bullet. No doubt you can focus on certain line items but we encourage our companies to think before acting and not making quick decisions. We like to take a thoughtful approach and balance the tension between the short-term and long-term goals of the business.

Note, per the Small Business Administration one of the top reasons Companies don’t make it is they run out of cash. And the reason they run out of cash is they have more money going out in the form of expenses than money coming in in the form of revenue.

So this is a financial discipline worth investing in for your business.

So one last question, how is your expense management process and what needs to change?

3 Key Takeaways Related to Cutting Expenses 

If you want to build and grow your business, you need to make sure you are keeping an eye on expense management.

Here are three key takeaways related to reducing your expenses:

  1. Make sure you have done the hard work of building a detailed monthly budget. Review the budget versus actual by line item each month. Reflect on what you are learning. And determine what may need to change and re-forecast based on your learning.
  2. Lean into your process. Make sure that you have an expense management process in place that is followed by all. Assign one manager to oversee this to make sure that they are banging the drum on the expectations.
  3. Assign team members to be accountable for specific line items. Have them own the expenses and be prepared to offer up the “why”, suggestions for improvement, and take on the responsibility of the execution of any change needed.

Cutting business expenses

New Economy Team Members are Experts in Accounting for Entrepreneurs

If your Company is off track and expense management isn’t your thing, you struggle with building budgets that properly allocate funds, or you want to gain control of your finances to make smart decisions to build and grow your business, New Economy is an excellent partner. 

We’ll help you get your accounting done, and done right.

Schedule a time to meet with our Founder, Jeff, and discuss how we can add value to your situation.

Use Efficient Data to Reach Business Financial Goals

/in , , , /by

If you are a typical business owner, there’s a good chance you wake up at 2 am some mornings with an uneasy feeling – trying to crunch numbers in your head and get an accurate pulse of what’s going on in your business. But with out-of-date and tough-to-read data, things just aren’t adding up. 

So you take the pulse based on your gut. But deep down, you know this isn’t going to get your business where you want it to be. 

New Ecomony’s solution – formulate your data in a way that allows you to consistently and accurately take the pulse of your business so you can take effective action.

If this sounds good, read on.

business financial goals

Do You Have Business Goals? 

Goals are defined as a desired result that you, or a group of people, plan and commit to achieving. Does your business have them? If not, you should. 

Here are some of our best tips for setting goals for your business: 

Get Your Team Involved 

Your team is full of ideas and has an interest in the success of your business. Get them involved. Get their buy-in, and gather their thoughts and ideas. Lean into what they have to say and use it to help you build out your goals. 

Think Through Your Priorities

Think of your top 1-3 priorities in your business that need to be focused on to move it forward. This may take some deep thought and serious evaluation, but it will be worth it. 

Ask yourself:

  • Where is your business now? 
  • What are you trying to accomplish? 
  • Where are you trying to go? 

Your goals should help you accomplish your priorities. 

Create SMART Goals

Following the SMART goals framework helps you build good goals. 

Here’s what we mean:

  • S – Specific 
    • Make your goals specific and narrow.
  • M – Measurable
    • Define how you will measure your success towards reaching the goal.
  • A – Achievable 
    • You have to be able to accomplish your goal. Don’t set the bar too high. 
  • R – Relevant
    • Make sure your goals align with your priorities.
  • T – Time-based
    • Set a realistic end date for reaching your goals. 

Document Your Goals 

Once you’ve built out your goals, document them. 

Make them clear to your team. 

Hold yourself accountable. 

Having goals won’t do you any good if you are the only person who knows they exist. 

What Does Your Data Look Like? 

Financially speaking there are certain data components that can help to determine if you are on or off track. When you track the right data, you have the opportunity to make decisions to right the ship when things are off track.

Here’s what your data should look like: 

Every Business Should Have a 1, 3, and 5-Year Financial Plan

A strong financial plan will be broken into 1-year, 3-year, and 5-year segments. You’ll be able to refer back to your financial plan to bring the business you want to life. Think of it as a roadmap. 

You can break your financial plan down by month and measure it against actual financial results. This is the KEY. If something is off, you need to be able to gain an understanding as to why. 

Assign ownership to an individual to get to the root cause and offer up suggestions to get things back on track.

By following along with your plan, you can also narrow down what resources are needed as you go, like: 

  • Cash
  • Customers
  • Employees
  • Equipment 

As you build out your financial plan, use our top 4 financial tools to guide you. 

Use a Weekly Scorecard 

Every business should have a weekly scorecard. At New Economy, we believe a good Key Performance Indicator (KPI) in the form of a scorecard will help you manage data and provide you with a pulse of your business on a consistent basis. This will allow you to take prompt, effective action.

Here’s how you can create an effective scorecard: 

  • Identify and agree on the top 10 items to measure
  • Make someone accountable for each measure
  • Create goals for each measurable
  • Make the measurable time sensitive
  • Make someone accountable for getting the measurable and filling in the scorecard each week
  • Use it

Each Team Member Should be in Charge of a Measurable

Keeping track of your measurables is essential, but the task shouldn’t just fall on one person’s shoulders. Give everyone on your team a number to keep track of. Doing this: 

  • Cuts through murkiness between manager and direct reports
  • Create accountability
  • Provides clarity and commitment 
  • Produces results (this is a big one as we are trying to use data to drive towards our goals) 

For example, if you are a service-based company, you might measure revenue by employee, and each employee understands what is expected of them. If they achieve their measurable, which should be aligned with the business goals and overall measurables, then you have a high degree of alignment and can rest assured knowing team members rowing in the right direction.

business financial goals

Bring Your Data to Life, Achieve Your Goals

By having a Financial Model, Weekly Scorecard, and Individual Measurables, you are bringing to life the data road map which can be utilized to help you achieve your goals. 

A few final thoughts to remember before you put the plan into action:

  • Be open to learning. What is the data telling you?
  • Dig deep. Is something off track? Get to the root cause.
  • Apply what you have learned and get things back on track.

If you’re searching for a financial partner to help you use efficient data to reach your business goals, schedule a call with our Founder, Jeff! Our mission is to help entrepreneurs gain control of their finances so they can make smart decisions to build and grow their businesses, and we’d love to help you!

Top Ways to Prepare for a Recession

/in , , , /by

Talks of a recession are growing as the economy continues to feel the negative effects of the Corona Virus and the war in Ukraine. 

Both have led to lingering supply chain issues, inflation reaching record highs, capital markets tightening up, and talent shortages across nearly every industry. 

For small business owners, a looming recession can be frightening. The last recession, which began in 2007 and lasted through 2010, forced nearly 1.8 million small businesses to go under. 

Now, business owners are intimidated and again struggling to keep up and adapt to a market that is trending downwards. 

However, there’s no need to fear, there is still time to prepare and strengthen your business for a potential recession. Here are some of the top ways to do it:

Review Your Expenses in Detail

As you prepare to fight the storm of a recession, the first place to look is your expenses. You’ve likely already sifted through your expenses and cut back in places where you were overspending or spending unnecessarily, but now it is time to go back to the drawing board. 

Instead of starting with all of the expenses you can cut, start by defining your necessary expenses. 

  • Rent
  • Utilities
  • Inventory 
  • Insurance
  • Employee salaries
  • Etc. 

From there, crosscheck these necessities with your current spending habits. What expenses don’t fit into these categories? 

This will give you an idea of what expenses you can do without when the time comes to save money. 

Manage Your Cash Flow Weekly 

We’ve said it before, and we promise to say it again, cash flow is the lifeblood of your business. It’s a strong indicator of financial health and without a positive cash flow your business won’t survive a recession. 

You can build your cash flow by: 

  • Tracking related metrics and utilizing forecasts to produce better outcomes.
  • Keeping a close watch on your accounts receivable by collecting payments on time and knowing what you are owed.
  • Updating vendor and partner contracts to ensure you are not overpaying. 
  • Running a pricing analysis to ensure you are still charging the right prices. 

As you start implementing these strategies, remember to wrap your arms around your cash flow and manage it weekly. 

New Economy’s FREE Cash Flow Projection Tool can help you do just that. It was built to help you predict your cash flow and make smart decisions about spending and saving. With our tool, you’ll be able to see all of the inflows and outflows that affect your bottom line over time so that you can plan ahead with confidence. 

Run Scenarios in Your Financial Projections

Your financial projections can determine how well your business copes with the effects of a recession. They’ll use previous data to help you indicate where you may see problems down the road. 

As you prepare for a recession, you should create financial projections for what would happen if you cut expenses, saw changes in revenue, increase or decrease your prices, and so forth. This will give you better visibility as you navigate the downturn and help you make the right decisions to keep your business afloat. 

Revisit Financing Options Now

Before it’s too late, explore your financing options. Now is a great time to speak with lenders or investors, apply for grants, or even start a crowdfunding campaign. 

However, be clear with how much additional cash you need to raise before you dive in. You can use the free cash flow tool here, as well, to gain greater visibility and determine how much you may need to survive a recession. 

Get Accurate and Updated Financials

Knowing where your business stands at all times is key to preparing for and withstanding a recession. 

There are multiple tools you can use to get accurate and updated financials. The top four tools include: 

  • Cash Flow Tool
    • As we mentioned, this helps measure the inflows and outflows that affect your bottom line.
  • Weekly Scorecard
    • This includes the KPIs you need to reach your business goals.
  •  Financial Projections
    • These are predictive analyses you can use to help you make informed decisions. 
  • Month-End Close
    • This is a monthly recap of your financial statements. By following the steps needed to complete your month-end close, you’ll also be staying on top of your finances month-to-month, which is essential for preparing for a recession. 

New Economy Can Help You Prepare

For business owners, the thought of a recession can be intimidating. However, with preparation, you can ensure your business comes out on the other side. 

We’ve covered the importance of reviewing your expenses in detail, managing your cash flow weekly, running scenarios in your financial projections, revisiting financing options, and getting accurate and updated financials, but if you’re still struggling to prepare for a recession, turn to New Economy for guidance!

We help entrepreneurs gain control of their finances to make smart decisions to build and grow their business – and that includes before, during, and after a recession. Contact us today to learn more about how we can help!

5 Ways to Manage Cash Burn and Runway

/in , , , /by

Every business, especially new startups or quickly growing businesses, should be keeping a close eye on their cash burn and runway. 

These metrics provide essential insight into the sustainability of your spending habits and the financial health of your business. If cash burn and runway are struggling, your business will also struggle. 

Below is an overview of what exactly cash burn and runway mean for your business and how you can manage them. 

What is Cash Burn?

Cash burn is a measure of how quickly your business uses your cash balance. In other words, cash burn is the measure of how much cash is flowing out of your business. 

Typically, cash burn is measured on a monthly basis. However, in some cases, when the need to use cash increases, it can be measured on a weekly or even daily basis. 

Why is Cash Burn Important?

Cash burn rate is a great indicator of the overall health of your business. It shows you:

  • How long you have until you run out of cash
  • If you have a healthy cash flow
  • How fast you are spending the money you have on hand

It’s important to find a healthy cash burn rate. In fact, a recent study shows that nearly 82% of businesses fail because of cash flow problems. 

If you are spending your cash too quickly, it can lead to a failed business. If you aren’t spending your cash fast enough, it can indicate a lack of growth and investment in your business.

For young businesses and startups, cash burn is especially relevant. Typically, profits are low during this time, which means managing your spending is even more important. 

How to Calculate Cash Burn

Cash burn for any given period of time is fairly easy to calculate. First, you have to identify your start and ending cash balance (found on your statement of cash flows) and then find the difference between those numbers. Next, you divide the difference by the number of months in the given period. The total is your monthly cash burn rate. 

Here is an example:

$300,000(starting balance as of Jan 1) – $120,000(ending balance as of March 31) = $180,000(difference)

$180,000(difference) / 3 (number of months in the period) = $60,000 monthly cash burn rate

Now that you know how quickly you are going through your cash, you need to determine how long you can withstand that spending rate. This is referred to as your runway. 

What is Runway and How is it Calculated? 

Runway is the amount of time your business can continue to operate with your current cash burn rate. Like burn rate, a healthy balance of runway is essential for any business. 

If you have a short runway, your business is quickly running out of time to survive. However, while a long runway sounds appealing, it could also mean you are not properly allocating your cash reserves. 

To calculate your runway, simply divide your total cash reserve by your burn rate. 

For example: 

$120,000(total cash reserve) / $60,000(burn rate) = 2 months left before your business runs out of cash. 

Tips for Managing Cash Burn and Runway

Ideally, your business will have a negative cash burn rate. This would indicate that you are bringing in more money than you are spending and would, therefore, lengthen your runway. 

Here are several proven ways to manage your cash burn and runway:

1. Reduce or Defer Non-Essential Expenses 

You’ll want to take a close look at your budget to determine if your expenses are bringing value to your business. 

Find where you can cut, reduce, or defer certain expenses. However, make sure your changes are sustainable. Making too many changes too quickly can stunt growth.  

2. Pay Bills Slower

If you aren’t reaping a benefit from paying your bills before they are due, hold off on your payments. 

This allows you to hold on to your cash for longer periods of time. 

3. Bill Sooner and Collect Faster

If you’re struggling with your cash burn and runway, one of the best adjustments is collecting your money sooner rather than later. 

Send your invoices right away and include terms for payment. If you’re struggling with collecting payments in general, try implementing a late fee or improving your collection methods. 

4. Raise Additional Funds 

Many new start-ups and small businesses have to go through multiple rounds of funding before they start seeing substantial profits. 

After calculations, if your cash burn and runway are not where you want them to be, consider raising additional funds. 

5. Increase Prices 

Inaccurate or low prices can negatively impact your profits. If you’re looking for more cash inflows, consider running a pricing analysis. Chances are, you’re charging too little for your products and/or services. 

Our Free Cash Flow Tool Can Help

Having clear predictions of your cash burn and runway can mean the difference between success and failure for your business. 

That’s why we put together a free cash flow tool that lets you plan your budget in advance and see how much money is coming in and out of your business over time. 

With the help of New Economy, you’ll gain control over your finances and position your business for success! Contact us today to learn more ways we can help you!

Evaluating Your Growing Company’s Budget as Year-End Approaches

/in , , /by

Budgets are essential for success in your growing company. They work as a guide to determine the resources needed to execute your vision, help with decision-making, and can serve as the backbone of a financially healthy business. 

However, plenty of growing companies create a budget and then push it to the side. If growth and a strong financial system are important to you, you’re going to want to keep your budget close, and consistently refer back to it each month to ensure you are on the right track.

Not only does properly evaluating your budget serve you in the current year, but it better equips you for the year ahead. 

Here are several ways you can evaluate your budget as year-end approaches. 

Compare to Actuals and Make Adjustments

Running a budget variance report is one of the most effective ways to evaluate your budget. Budget variance looks at your budget and compares it to your actuals. This will show you all of the areas where improvements could be made. 

From there you can make adjustments, based on data, that will redirect or improve your spending for the remainder of the year, making sure you finish strong and have a solid foundation for the year ahead. We refer to this as forecasting and you still want to hold yourself accountable to the original budget.

Making changes now will put you in a good place as you dive into creating your budget for the upcoming year. Spending that is recurring or on your budget in the previous year will be accounted for, meaning you can lean into those numbers and be confident in your spending plan. 

Plan for Changes

As you wrap up the current year and head into the new, you probably have a good idea of any new changes and resources that will be needed to drive your future vision.

Maybe you’re hoping to boost sales and believe launching a new marketing campaign will do just that. Be sure you account for this increase when preparing your budget for the year ahead. You also should consider other expenses like:

  • Changing to higher-priced vendors
  • Outsourcing work
  • Hiring new team members

These are all expenses you may not have had in the previous year but can foresee for the year ahead. 

Inversely, you may be cutting back your expenses by:

  • Changing to lower-priced vendors
  • Improving your sales channels
  • Lowering your costs of goods sold 

Also, consider the ways in which you will fund your budget based on your plans:

  • Maybe you need to raise capital through equity financing to support growth
  • Or perhaps there is debt capital available for cash shortfalls
  • Or maybe your plan is supported through self-generating cashflows

Be sure to plan for changes either way and incorporate them into your budget. This will help strengthen your budget and hopefully lower the number of changes you’ll need to make throughout the year.  

Tie Your Budget Back Into Your Goals

Your budget was likely created with your goals in mind, so have you checked to make sure you’re still on track to reach those goals? And what have you learned in this process that can be applied moving forward?

Being within your budget is great, and is a goal within itself, but if you aren’t reaching your other previously set goals, you still may need to make adjustments. 

For example, let’s say you want to lower your debt by year-end and you’ve been evaluating your budget to see if there are any areas where money isn’t fully being used. You notice you’ve been within your expected spending for marketing, in fact, you have allocated more money to marketing expenses than needed, and you have extra funds in this area. This may be the perfect opportunity to shift some of that remaining cash towards paying down your debt. 

One of the most important takeaways from the budgeting process is learning. And then becoming better predictors based on that learning as we apply it to the future.

Involve Your Team

There’s a good chance you relied on your team to help you create a budget, so it’d be beneficial for you to turn to your team to help you evaluate it as well. They may be more familiar with spending and the pulse of day-to-day operations. 

Involving your team can bring about new insight for: 

  • Lowering spending in certain areas
  • Being aware of areas the budget could be adjusted
  • Knowing where there may be changes coming

An added benefit to involving your team is that it creates an extra layer of accountability to their spending. When they are active in creating and evaluating the budget, they have a better idea of what is going on financially and how and where money should be spent. 

Turn to a Trusted Financial Partner

Evaluating your budget prior to year-end is incredibly important. Not only will it help you make adjustments to get you where you want to be this year, but it will also assist in creating a strong budget for the year ahead. 

To make sure your evaluation process is giving you all of the information you need to be successful, consider working with a trusted accounting partner, like New Economy. We’ll make sure your budget is accurate and focused on reaching your goals and take time to create a budget strategy with you that makes sense for your business. Through our partnership, you can confidently be prepared for the year ahead. 

Want to learn more about how we help growth-minded entrepreneurs? Schedule an appointment and we’d love to learn more about your business.

Download Our Free Cash Flow Tool

Want to dig deeper into your cash flow insights? We’ve created a free tool that will help you truly understand cash flow projection.

Download our cash flow tool here

CONTACT US

 (401) 256-2404

CONTACT US

 (401) 256-2404

Grow your business by leveraging your financial data. We’ll show you how.

Subscribe to my bi weekly Newsletter for tips, tricks and curated content on how we grew New Economy from $0 to $2.2M in revenue.

Subscribe