3 Keys to Turn Your Financial Budget into a Financial Forecast

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.

financial close

5 Keys to an Awesome Financial Close!

We all know financial statements are important.

Really important.

But why and how do we get there?

We believe that financial statements are important because they can be used to help you make smart decisions to build and grow your business.

It is really that simple.

financial close

But getting there is where we see most businesses struggle.

The bridge to getting timely and accurate financial statements is the month-end close process.

Most entrepreneurs and business owners don’t realize there is actually a process. And why should they since they are not accountants?

For those that do, there are a bunch of reasons why the process is not working which we will get into later in this post.

So the end game is getting timely and accurate financials using an awesome month-end close process.

Before we move on, for more background information on financial statements check out these quick posts “3 Key Financial Statements to Leverage for Growth” and “5 Ways to Understand Your Financials to Get Closer to Your Goals”.

Now back to the financial close process.

In this article, you will learn about: 

  1. The financial close process
  2. 5 keys to an awesome close process
  3. Top 3 Takeaways

Let’s dive in.

Demystifying the Financial Close Process

Full disclosure, we just set up a ChatGPT account. 

We are excited 🙂

Here is how ChatGPT defines the month-end close process.

The financial close process, often referred to simply as “the close,” is a series of steps undertaken by organizations at the end of an accounting period to ensure that all financial transactions for that period are accurately recorded and reported. This process typically occurs monthly, quarterly, or annually, depending on the reporting requirements of the organization.

The financial close process involves several key activities, including:

  • Reviewing Transactions: Accountants review all financial transactions recorded during the period to ensure accuracy and completeness. This includes verifying that transactions are properly classified and documented.
  • Adjusting Entries: Any necessary adjustments are made to account for items such as accruals, prepayments, depreciation, and other timing differences. These adjustments ensure that the financial statements reflect the true financial position of the organization.
  • Reconciliation: Various accounts, such as bank accounts, accounts receivable, and accounts payable, are reconciled to ensure that the balances reported in the financial statements match the supporting documentation.
  • Closing Entries: Temporary accounts, such as revenue, expenses, and dividends, are closed to the appropriate permanent accounts, such as retained earnings. This process resets the temporary accounts to zero in preparation for the next accounting period.
  • Financial Reporting: Once all adjustments and closing entries have been made, financial statements are prepared, including the income statement, balance sheet, and statement of cash flows. These statements provide an overview of the organization’s financial performance and position during the period.
  • Review and Approval: The finalized financial statements are typically reviewed by management and may require approval from stakeholders such as the board of directors or external auditors.
  • Archiving Documents: All supporting documentation related to the financial close process, including journal entries, reconciliations, and reports, are archived for future reference and audit purposes.

The financial close process is crucial for ensuring the accuracy and integrity of an organization’s financial reporting. It allows stakeholders to make informed decisions based on reliable financial information and helps maintain compliance with regulatory requirements. Additionally, a well-executed close process can identify potential errors or discrepancies early, allowing for timely corrective action.

Darn, that was pretty good. Thanks Chat GPT!

Our simple and high-level definition is:

The Financial Close process is a series of steps to help ensure that each month the financial statements are delivered in a timely and accurate manner.

Entrepreneurs and business owners need the financial statements for the following reasons:

  • Access if the business is on track with its financial goals
  • Determine the financial health of the business
  • Have data to make smart decisions

Now we have an understanding of this process and why it’s important.

Let’s jump right into 5 Keys to make it awesome.

5 Keys to an Awesome Financial Close Process

Here are 5 important considerations to create an awesome close process.

Key #1 – Make sure there is a month-end close checklist.

We love checklists. They provide clarity around the steps that need to be performed to get the desired outcome.

For the desired outcome to be accurate financial statements then some steps need to be performed to accomplish that desired outcome.

Let’s look at Chick-fil-A as an example, since we love their chicken sandwiches.

Whether you go to a Chick-fil-A in Rhode Island or California your spicy deluxe chicken sandwich will taste the same, take the same amount of preparation time, and be delivered with a smile.

Why?

They have checklists covering the various components of preparation and service. And they do this at scale.

So relating to the month-end close here are a few examples of items that should be on that checklist.

Bank Accounts

  • Ensure all transactions are properly flowing into QBO
  • Ensure all transactions are properly coded to the proper GL account
  • Ensure that the bank reconciliation is prepared
  • Ensure that the reconciling items are identified around outstanding checks
  • Ensure that the reconciling times are identified around deposits in transit

Fixed Assets

  • Ensure that assets purchased over $1,000 are capitalized
  • Ensure depreciation is booked on all assets each month
  • Ensure that assets no longer being used are removed 
  • Ensure that your depreciation schedule agrees with your balance sheet
  • Ensure that  your depreciation expense agrees with your profit and loss statement
  • Ensure that repairs and maintenance are properly expensed in your profit and loss

An accountant at the staff level should be able to perform the above procedures to ensure that the accounts are properly stated on any balance sheet.

This can be replicated each month and over many types of accounts. 

You get the point, the checklist allows for scalability just like the chicken sandwich in different states at different store locations. Yummy.

Key #2 – Make sure you create accountability and set due dates.

This one is very important.

It is simple yet at the same time complicated.

Take the above example and apply it to bank accounts.

We can simply create accountability by assigning those steps to Tom with a due date by the end of the second week.

That’s pretty clear and straightforward. The complexity comes into play when Tom gets sick or information is not ready. 

The key here is to manage well, be flexible, communicate new due dates, and hold the line on accountability.

Here are some of the challenges we see that are easily avoidable:

  • No one is a named owner of the task
  • There are multiple owners of the task, thus no owner
  • There is no set due date
  • If expectations change, there is no new due date set
  • There is no conversation around accountability for missed deadlines

Keep in mind how important this is. 

The reason for our month-end close process is to deliver timely and accurate financial information and if Tom is not timely, our goal will be missed.

The answer here is to lead, manage, and hold Tom accountable. 

Key #3 – Establish a quality control review of the financials. 

Ok, so the checklist is complete and Tom has met all his deadlines.

Now we are onto the quality control process.

Remember, Tom is a staff accountant. His work needs to be reviewed and checked by Jerry the Quality Control team member.

Since we are using financial statements to make smart decisions, we want to make sure the financials are reviewed by an experienced team member.

This goes back to steps #1 and #2.

A checklist should be prepared for the quality control reviewer to perform.

Further, Jerry should have deadlines as well and should be held accountable so that we can meet the desired outcome.

It could create some real pain around cash flow if an entrepreneur makes bad decisions due to relying on bad financial statements.

A quality control review is a good investment in making good decisions.

Key #4 – Establish a month-end close meeting where the financials are reviewed.

This is one of our favorite meetings at New Economy.

Here we get to focus on our core value of delivering awesome service.

We schedule 30-minute monthly zooms to provide our entrepreneurs with financial results from the month and LOTS of knowledge that we derive from the financial statements is spoon-fed to our customers.

Here are some examples of what we discussed during the close meeting:

  • Budget versus actual results by line item with a narrative
  • Cash burn for the month 
  • Reporting on KPIs with the narrative
  • Focus on spend management
  • Connect actual results to financial goals

It’s pretty fun to tease this information out of the financial statements.

We are providing visibility and information on changes needed in the next month, based on the learnings.

Key #5 – Apply what you are learning during the financial review.

Don’t get me wrong.

There is a lot of work in steps #1-#4.

But the real magic happens here.

After that month ends, the big question is “What did we learn?”.

Maybe we learned in our budget versus actual analysis that we are overspending on software costs. This is causing us to be off track from our goals.

Our advice is to dig in. 

Is this overspending going to keep happening? Do we have to shut it down? Was it a one-time thing and it will fall back in line next month with some underspending?

I think you get the point.

There is a lot of learning in the financial statements that have action items that can improve the financial performance of the business.

This is gold for any entrepreneur.

And you don’t need a full-time accountant to pull this off.

Learn more in our blog post on outsourcing your accounting to a part-time remote accountant.

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 monthly close checklist. It should be written and updated quarterly. This will help you get to the desired outcome. Further, if you and your accountant should part ways you have a road map for performing the month-end close specific to your business.
  2. Make sure you are clear with deadlines and hold your team accountable. This is key to getting timely financial results. And you are also striving for accuracy so setting up a monthly quality control review is important.
  3. Once you get your financial statements, use them. Learn how to read them. Learn what they are telling you about your business. And then go take that learning to improve the financial condition of your business.

There you have it 🙂

financial close

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.

5 Ways to Know You Need a New Accountant

Having the right accounting and finance team is important. 

Really important.

Why?

Contrary to popular belief, your accounting team is not just overhead.

You need timely and accurate financial information to make smart decisions to build and grow your business.

Accountant

At New Economy, we think about the right seats needed to support the accounting department for any business. Then we think about getting the right people in those seats.

Most small businesses need some form of an Accountant, Controller, or CFO. 

It really depends on the type of business, the stage the business is in, and the growth plans the business has for the future.

And each of these seats has a different skill set and value they bring. It goes from tactical to strategic in nature.

For more information on the differences between each seat check out our post on Do you know the difference between an Accountant, Controller and CFO.

But what are the signs that your accounting team is not working?

In this article, you will learn about: 

  1. The top reasons your accounting set up is no longer working
  2. 5 ways to tell it’s time to change accountants
  3. Top 3 Takeaways

Let’s dive in.

The Top Reasons Your Accounting is No Longer Working

There are several reasons why this can be the case but here are a few.

Reason #1 – Sorry, You really don’t have an accountant.

Very early on in the life of your business, you might have had Tony’s aunt doing the accounting. 

There is nothing wrong with Tony’s aunt. However, she is self-taught and doesn’t fully understand what she is doing. Sure, she can pay bills and is wicked cheap, but she’s just a family friend, not an accountant.

This is common and ok, but this will hold you back if you don’t make a move.

Reason #2 – The business outgrew your current accountant.

You have a vision of where you want to be. You are chasing down that vision and raising capital, hiring people, building processes, and executing your plan.

Your business is growing and evolving, and when that happens things can get complicated in the various departments, such as your accounting department.

But your current accountant is stuck in the old way of doing things. They don’t have a grown mindset and they are not open to technology and new ways of doing things. 

This results in delays and inefficiencies because the business is growing but your accountant is not growing with it.

This too will hold you back. 

Perhaps you have a good tactical person but need to layer on a more experienced person who focuses on strategy from an internal perspective.

Reason #3 – Your accountant is overhead and is doing too many administrative tasks.

Many internally placed accountants get very comfortable and are overpaid. 

Yup, I said it.

They have a high-level technical skill set and are compensated for it. 

But they are given tasks that don’t relate to this skill set. They start doing administrative work, they get pulled into a bit of human resources or even managing technology.

They get pulled in too many directions, are overpaid, and are no longer adding value. 

They become overhead as opposed to an investment that is helping you get closer to achieving your goals.

Reason #4 – You don’t need a full-time accountant.

Once you really dive into point #3, you may realize that you don’t need a full-time accountant. 

How can this be?

You have them focus on the functions that require their specialized skill set. Nothing more, nothing less.

For more information on this check out our blog post on hiring a part-time remote accountant.

Also, as part of not needing a full-time accountant, you can save money. You are not covering insurance, benefits, training, or even internal time to manage this person. We believe the cost of a part-time remote accountant can be a big savings with a better return on your investment.

For more information on this check out our blog post. “What will it cost to outsource my accounting?

Ok, so now you have some reasons as to why our accounting might not be working.

And it’s ok. 

You are not alone. Part of your job is to ensure the right people are in the right seats to help you achieve your plan.

In the next section, we will discuss some of the indicators that it’s time to start thinking about some changes on your accounting team.

 

5 Ways to Tell It’s Time to Think About a Change in Accountants

So we know why you might be having issues.

But how exactly do those issues manifest?

After years of experience, we have identified 5 key ways to tell it’s time to make a change.

Here they are in no particular order:

Reason #1 – You are not getting timely financial information.

If you are not getting the following reports within the following timeline a red flag should go up:

  • Cash Flow reporting – Weekly
  • KPI / Scorecard reporting – Weekly, Monthly, Annually
  • Financial statements – Within 20 days of month end
  • Budget vs Actual reporting – Within 20 days of month end
  • Forecasting – Updates within 20 days of month end

Having timely information is important. You want to make real-time decisions based on data that is current.

Reason #2 – You are not getting accurate financial information.

If you are not getting accurate financial information a red flag should go up. The information is the same as that listed above. 

But how do you know it’s accurate considering you’re not an accountant and an entrepreneur?

Here are some thoughts:

  • Use your gut, it got you this far
  • Share the information with a peer group and compare information
  • Ask a trusted advisor or mentor with a financial background to have a look

Timely and accurate information are the keys to making smart business decisions.

Reason #3 – You keep getting surprised and are not learning from the past.

No one likes surprises. 

So if you’re looking at your budget versus actual reporting and are surprised when something is off track, a red flag should go up. 

Or if you get to year-end and your monthly financials that have been reported on change, a red flag should go up.

Or if you are caught off guard by an unexpected tax bill, a red flag should go up.

Things change fast in business, but learning and applying is key. 

Remember the old saying “Fool me once shame on you but fool me twice shame on me”?

Reason #4 – You can’t see into the financial future.

Your historical statements are very important. 

As we stated, they need to be accurate and delivered on time.

But we also need windows out into the future from a financial perspective. So if you can’t see out into the future whether it be 13 weeks of cash flow into the future or 24 months of your profit and loss out into the future, a red flag should go up.

Reason #5 – You are frustrated and feel pain and confusion on the financial side of your business.

We have said it before, trust your gut. You have great intuition.

So if even hearing the word financials causes you to feel pain or frustration, a red flag should go up.

Or if your accountant is confused and can’t seem to give you straight answers, a red flag should go up.

So there you have it; 5 examples that can give you an indication it’s time to think about changing your accounting team.

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 the right people in the right seats on your accounting team. Early on Tony’s aunt might have been a great fit. But since you have raised some capital, have 10+ employees, and are on your way to profitability it’s time to increase the firepower of your accounting team.
  2. Make sure you are not flying blind. You should have timely, accurate historical financial statements and visibility into the future financial condition of the business based on your forward-looking projections.
  3. Trust your gut and invest in your accounting and financial team. They are an investment that should help you to get closer to your goals by providing you with invaluable insight to make great business decisions.

There you have it 🙂

Accountant

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.

financial statements

5 Ways to Understand Your Financial Statements and Get Closer to Your Goals

Having financial statements is important. 

Really important.

Think about the dashboard in your car. You have many gauges and lights that tell you different things going on in your car.

For instance, you have a gas light. If the gas light is on, it’s a warning that you need to fill up your gas tank. If you avoid this you may get stuck and you may not make it to your intended destination.

Or you have an oil light. If this is on and you don’t put oil in your engine, your engine could potentially seize you and you will have a major problem.

This is all good information to have. This information allows you to make good decisions for your vehicle, your primary need for transportation which is very important.

financial statements

Financial statements are much like the gauges on the dashboard of your vehicle.

They give you information about the financial condition of your business.

We run into many entrepreneurs who don’t know how to use this important information, and that’s ok, they are entrepreneurs and should be casting vision and building stuff. 

However, they should still have a high level of knowledge on how to use financial information to help them get closer to their goals.

In this article, you will learn about: 

  1. The three standard financial statements
  2. 5 ways to understand your financial statements
  3. Top 3 Takeaways

Let’s dive in.

The three standard financial statements

Pop quiz.

Do you know the three standard financial statements that you should be using to assess the financial condition of your business?

If not, we got you.

They are:

  • The Balance Sheet
  • The Profit and Loss Statement
  • The Statement of Cash Flows

Balance Sheet

Your balance sheet is a statement that will help you to understand the financial condition of the Company.  

We all want to know how our business is doing, don’t we?

It shows all of your assets, liabilities, and equity in the business. 

Your assets are things like cash, accounts receivable, and fixed assets. They are used to help your business produce future value.

Your liabilities are amounts you owe to third parties in the form of accounts payable. Liabilities can be good if used properly. They allow you to “borrow” as you typically have 30 days to pay the third party. 

Long-term bank debt is another form of liability. This can be used for timing issues like making purchases up front that will produce value down the road and allow us to repay the debt.

Lastly, your equity is all of the capital contributed to the business as well as profits and losses accumulated.

Profit and Loss Statement

Your profit and loss statement will help you understand if the core product or service you are delivering is producing a profit. 

It is divided into a few sections as follows.

First, you have your revenue and cogs. Your revenue is straightforward and represents your earnings for doing what you do. Your cogs, or cost of goods sold, is variable with your revenue. Meaning if your revenue goes up, it’s likely the costs to produce the revenue go up. The key here is the gross profit.

Next, you move into operating expenses. These are typically fixed expenses and things like rent, marketing, software, and salary expenses.

So if you take your revenue less your cogs less your operating expenses you will get to your profit number. 

Cash Flow Statement

Ok, so your cash is driven by profitability. If your Company is producing a profit on its Profit and Loss Statement you are generating cash flow.

The cash flow statement shows all the sources and uses of cash. 

As for sources, we simply mean where your cash is coming from. As for uses, we simply mean where your cash is going.

This is a great statement to help you get a handle on how much cash you burned through in a particular month and where it went.

General thoughts on financial statements

Ok, here are some general thoughts on financial statements in bullet form.

  • These should be produced timely. Typically within 30 days of the end of the month.
  • These need to be accurate. You need good financial statements to make good decisions.
  • To get to accuracy you need the right person producing them. Make sure the team member has the right level of experience.
  • If you are doing $1M or more in revenue, you should consider accrual accounting. It paints a more realistic picture of profitability.
  • Reflect on these and seek to understand what they are telling you about the business.

In the next session, we will get into ways to understand the financial statements. It requires a pause at month end to really deep dive into them to pull out the “golden nuggets”.

We did write a detailed post on these financial statements here if you want to dive deeper.

 

 

5 Ways to Understand Your Financial Statements

We are pretty sure there are more than 5 ways to understand your financial statements.

However, we will cover 5 which should help you better understand how your business is performing.

Let’s take each financial statement one at a time and try to glean some wisdom out of them.

Balance Sheet

The balance sheet of your business will help you to understand the following:

  • The degree of working capital in the business. Working capital is the business’s ability to meet short-term obligations with current assets. It is an indicator of the business’s ability to collect on receivables, manage inventory well, and leverage accounts payable terms. 

For example, Amazon has $100 in current assets and $50 in current liabilities. The working capital for Amazon is $50 ($100-$50).

On the other hand, Facebook has $75 in current assets and $70 in current liabilities. The working capital for Facebook is $5 ($75-$70).

Amazon wins. The higher the working capital, the healthier the business as there is more of a cushion to meet the current needs of the business.

  • The receivable turnover of the business will help you understand how quickly you are converting accounts receivable to cash. Cash is king, so the faster the better. 

For example, Amazon has $500 in net sales and $100 in average receivables. The receivable turnover for Amazon is 5 ($500/$100).

On the other hand, Facebook has $500 in net sales and $50 in average receivables. The receivable turnover for Facebook is 10 ($500/$50).

Facebook wins. The higher the ratio, the healthier the business as cash is coming into the business quicker and the Company is managing collections better.

Profit and Loss

The profit and loss statement of your business will help you to understand the following:

  • The Gross profit % of the business will help you understand how much profit you earned on the sale of your products or services.

For example, Amazon has $500 in net sales and $100 in Cogs. The gross profit for Amazon is 80%($500-$100=$400 then $400/$500=80%).

On the other hand, Facebook has $500 in net sales and $50 Cogs. The gross profit for Facebook is 90% ($500-$50=$450 then $450/$500=90%).

Facebook wins again. The higher the percentage, the more money is earned on the product sales. It states that for every $1 of revenue that Facebook earns, they get to keep $.90 for profit.

  • The Net profit % of the business will help you understand how much profit you earned on everything. This includes your fixed expenses.

For example, Amazon has $500 in net sales,$100 in Cogs, and $20 in Op X. The net profit for Amazon is 76%($500-$100-$20=$380 then $380/$500=76%).

On the other hand, Facebook has $500 in net sales, $50 Cogs, and $5 in Op X. The net profit for Facebook is 89% ($500-$50-5=$445 then $445/$500=89%).

Facebook wins again. The higher the percentage, the more money is earned overall in the business. It states that for every $1 of revenue that Facebook earns, they get to keep $.89 for profit.

Cash Flow Statement

  • The Cash burn rate of the business will help you understand the rate at which your business spends money and the number of months of cash you have available. 

For example, Amazon has $100 in cash and spends $50 per month. The burn of 50 per month results in 2 months of runway. ($100/50).

On the other hand, Facebook has $200 in cash and spends $30 per month. The burn of 30 per month results in 6 months of runway. ($200/30).

Facebook wins again. The more months of cash flow the more the business can be supported longer. 

Summary of understanding your financial statements

Based on utilizing the financial statements, we were able to understand things like liquidity, profitability, and even cash reserves.

These metrics, driven by the financial statements, help us to better understand how the business is performing.

The beauty of using the financials and these metrics is you can track and compare against yourself to see your improvement. You can even compare yourself against your competitors, industry averages, or your future goals.

No matter what, your financial statements are a great source of helping you understand the financial condition of your business. 

And the better the financial condition, the higher the probability of your being able to have the resources to meet your goals and vision.

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 are getting accurate financial statements within a 30-day period after the month’s end. If you are not sure if your financial statements are accurate, reach out and we can provide you with some feedback.
  2. Take the time to reflect on your financial statements. Determine what they are telling you about the financial condition of your business. Continue to monitor your progress against the historical financial statements and benchmark against competitors.
  3. Do the work. Meaning, if your financial condition is not good or has deteriorated, determine what is driving that and fix it. Go into the business and spend the time getting to the root cause of the issue. The financial statements are just the indicator of something either being on or off track.

There you have it 🙂

financial statements

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 Boost Your Confidence in Your Small Business

How Leveraging Financial Data and Your Accounting Team Can Help.

As a growth-stage entrepreneur, you’re constantly dealing with emotional highs and lows based on the various circumstances thrown your way that are not in your control. 

We feel your pain. 

And we have learned that this can impact the confidence you have in your small business. But what really is confidence?

Here are a few definitions. 

  • It is the feeling or belief that one can rely on someone or something.
  • Or defined another way, a feeling of self-assurance arising from one’s appreciation of one’s own abilities or qualities.
  • Or the state of feeling certain about the truth of something.

Which begs the question: Do you have confidence in your small business? And can you increase that confidence in your small business using financial data and leveraging your accounting team?

At New Economy, we believe so.

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 types of issues might be eroding your confidence in your small business
  • What you can do to overcome these issues 
  • Three key takeaways related to improving the confidence in your small business using data

Let’s dive in.

Small Business Confidence

What Issues May be Eroding Your Confidence in Your Small Business?

There are a few important things to discuss here. 

First off, there is no silver bullet and the game of business covers a lot of ground. Therefore, we will focus on issues on the financial side of your business, which is the space that we play in. But this approach can be applied to any department such as marketing or even operations.

So what could deteriorate your confidence in your small business as it relates to the financial side of your business?

Maybe it’s people, maybe it’s process, maybe it’s technology, or maybe it’s a combination of all three. 

Let’s Talk People

Start with the Right Seats

Before we dive in, let’s discuss the seats in your accountability chart. And here is a question–Do you have a sense of the right seats and core functions needed for your business based on your stage, growth trajectory, and goals?

We believe every entrepreneurial, growth-minded company needs 3 foundational seats, each with a different set of skills and unique abilities (for more, check out our blog on the difference between an Accountant, Controller, and CFO). Here they are:

  • Bookkeeper / Accountant – They focus on tactical things like payroll, bill payment, bank reconciliation, credit card reconciliations, and invoicing and collections. This team member may have 3-5 years of experience.
  • Controller – They focus more on the output which would be things like accurate financial statements, accounting processes, managing the Bookkeeper, and working directly with the CEO or CFO. This team member may have 10-15 years of experience.
  • CFO – They focus on the business. They are a strategy partner to the CEO and they oversee everything related to accounting and finance and will get involved in budgeting, forecasting, and helping to bring plans to life. This team member may have 20+ years of experience.

Now that we have the right seats in place, you need to find the right team members and this is where people come into the picture.

Then Find the Right People to Fill Those Seats

At New Economy, we ask ourselves a few questions about placing a team member in a seat such as the ones mentioned above.

First, are they aligned with our core values at New Economy? If not, they will not be a good fit for our company, and we don’t place them. If yes, we move on to the next question.

Do they get it, want it, and have the capacity to complete the functions needed for the seat? If not, they will not be a good fit for the seat and we move on. But maybe through training and development, we can get them there. And if yes, then we place them in the seat.

So, if you don’t have the right seats, or maybe you have the right seats but the wrong person in them, you will face challenges. Chances are:

  • You are frustrated
  • your team member is frustrated and feeling burned out
  • You are not getting financial information to make smart decisions to build and grow your business

So your confidence could be down to not having the right structure and seats in your accountability chart or not having the right people sitting in those seats.

Consider stopping doing your own bookkeeping or using Tom’s uncle’s cousin who really is a party planner! Take the time to get this right. 

If you get this right, you will have an accounting and finance department that is aligned with your vision and provides useful financial data, actionable insights, and business improvements all to help you build and grow your business. This is an investment in your business that will return extraordinary results.

Let’s Talk Process

The next issue that might be eroding your confidence in your small business is the lack of process. At New Economy we are consistently reviewing our core processes, documenting them, and training others to ensure they are followed by all.

By having documented processes in your accounting and finance department you are ensuring that team members are clear on how to do things and you are mitigating the chances for errors, inefficiencies, or even fraud. Yup, we said fraud which nobody thinks about until it’s too late.

But here is the real reason the documented process is important: It will ensure that over and over again you have a procedure in place to consistently produce a desired outcome in a timely and accurate manner. 

For example:

  • Processes will support the release of timely and accurate financial statements. A process around the month’s end will allow any controller to step in and provide you with financial data that you can rely on to make great business decisions.
  • Processes will ensure that bills are paid on time for goods and services that we have received (we have seen vendors getting paid for things they should not) and that payments are going out at the right amount per the actual purchase order and invoice.
  • Processes will ensure that your business is on track to meet its annual budget. At month’s end, the actual financials can be compared to the budget to show what is on and off track. From there, you can forecast the future based on what you are learning to see how you are lining up compared to the budget. 

We prefer to rely heavily on processes. The process runs the business and the people step in to run the process. This takes time and effort but it is worth addressing in all departments in your company.

So, if your accounting team is always late with providing information, missing key information, or off on the accuracy we can see why your confidence might be down. And it may be due to a lack of processes needed to support where the business is currently at today.

A few final thoughts:

Having a documented process may not be enough. We believe that team members need to be trained in processes. Further, the process needs to be followed by all. So, you need a process to ensure that processes are being followed – yikes! 

But in the end, the process will give you the confidence that you are receiving financial information that is both timely and accurate. And this will give you insights as to how your business is performing.

Let’s Talk Technology

Remember the old days when you used to get a set of financial statements printed on ledger paper?

We don’t! And if someone handed us a set of financial statements on ledger paper our confidence would certainly drop. We’d question, in a healthy way, if we could rely on the numbers.

See, we have built New Economy from the ground up by leveraging a technology stack that allows us to provide virtual accounting and finance services worldwide. It’s faster, more efficient, more cost-effective, easier to build processes, and easier to train team members on how to use technology tools.

However, many companies’ accounting and finance departments are still struggling to adopt new technologies that will increase efficiencies, reduce errors, and allow team members to spend more time analyzing information and providing actionable insights.

The point is: Consider what technology you might be able to use to change the game and build your confidence. 

Here are some examples:

The list goes on and on. 

But the main point is that the use of technology can speed the flow of information up and assist with increasing the accuracy. Further, processes can be wrapped around these technology tools, meaning technology has an impact on increasing your confidence in your small business.

 

What Can We Do to Overcome the Issues that are Decreasing Your Confidence in Your Small Business?

The very first thing we suggest you do is step away from the day-to-day of the business. Most growth-stage entrepreneurs have too much on their plate and it’s hard to reflect and think strategically when you are in the business.

So what do you do?

Take clarity breaks. A clarity break is a regularly scheduled appointment on your calendar with yourself. You define what regular is – a half-hour daily, two hours weekly, a half-day monthly. It’s up to you. The doing of it is what matters.

Note: We like to take these in physical spaces that motivate, inspire, and encourage us. For example, I like to take my clarity breaks in my 1986 VW camper van by the ocean. Some team members like to take them at Starbucks. But the point is, get away from your regular space.

OK, so I am in my van, now what?

We would encourage you to reflect on the above and ask the following questions:

  • Do I have the right accounting and finance seats on my accountability chart?
  • Are the functions for each seat clearly defined?
  • Do I have the right team member with the right skills sitting in the seat?
  • Do I have processes supporting each function in these seats?
  • Are the processes being followed by all? Are they evolving with the business?
  • Do I have the right technology to increase productivity?

Reflecting and answering these questions will increase your confidence in your accounting and finance team and provide you with the information you need to build and grow your business such as:

  • Ways to increase profits
  • Ways to mitigate risks
  • Ways to run smoother
  • Ways to improve business insights
  • And ultimately increase business confidence

We have subscribed to this approach to help build and grow New Economy. You can do this for literally any department in your business. 

But should you want to get there quickly, consider hiring a company like New Economy that has done the hard work for you 🙂

And once you have the confidence in the back end of your business, you are ready to go and ready to grow. You have the foundation built to support the needs of your customers while capturing market share.

3 Key Takeaways Related to Improving Confidence in Your Small Business Using Data and Leveraging Your Accounting Team

If you want to improve your confidence in your small business, consider leveraging your accounting and finance team and the data they provide.

Here are three key takeaways related to improving your small business confidence:

  1. Make sure you know the needs of your business and that you have clarified the roles. Further, make sure that you have the right person with the right skill set to meet those needs by being able to perform the core functions of the role.
  2. Lean into your process and technology. Make sure that you have a documented process followed by all. Further, make sure that you are using the best-in-class technology for efficiency purposes.
  3. Take time away from the day-to-day to reflect. Think about what’s working and not working, and what next people move you need to make. This time is valuable in that it will provide new ideas and actionable insights to chase down your goals.

Small Business Confidence

New Economy Team Members are Experts in Accounting for Entrepreneurs

If your Company’s accounting and finance team is not providing data to help build your confidence in your small business, let’s talk.

New Economy makes an excellent partner because we want you to gain control of your finances to make smart decisions to build and grow your business. 

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.

5 Financial Levers to Increase Cash and Profits in Your Growth Stage Business

As a growth-stage entrepreneur, you’re constantly thinking about ways to increase cash and profits in your Company. The more profitable you are, the more cash you can invest in people and strategies to support your growth.

Sounds simple, right? 

At New Economy, we’ve used some of these tactics ourselves to grow our revenue from $0 to $2M with a gross profit margin of 50% and net profit of 15%. 

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

In this article, you will learn about: 

  1. 7 key financial levers to increase cash and profits and the impact
  2. Top 3 takeaways 

Let’s dive in.

What are the 5 Key Financial Drivers to Increase Cash and Profits?

First off, every business is unique and things vary from industry to industry. However, we believe that there are 5 drivers that each business should focus on.

Here they are:

1. The first driver is Price. Certainly, we all know what price is defined as. It is what we are charging our customers for our goods and services. 

At New Economy, we are being innovative on the pricing front. For instance, we are focused on what we call value-based pricing. We are not thinking about rate and time but more about the value we are producing for our customers. This requires a deep understanding of the customer’s needs, wants, challenges, and goals. From there the goal is to add value to help them meet their goals, remove obstacles, and provide for needs and wants. 

For example, as it relates to achieving goals, it might take us 15 minutes to come up with a solution that will save a customer $50,000 which increases their net profit. We believe the value of that is worth much more than the time that we put into it. So if priced hourly, we would price the service out at $37.50 (15 min x $150) versus pricing it out based on the value, which would be more of an art and say $2,500. Would you pay $2,500 to save $50,000? I know I would.

Here are a few quick questions for you relating to price. 

  • Do you have a process for increasing your prices? 
  • When was the last time you increased your price?  
  • How are you determining your price? 
  • Is your price truly representative of the value you are adding to the marketplace?

2. The second driver is Volume. This is the number of units, services, or hours that you are providing to your customers. Getting back to knowing your customer, is there an opportunity to continue to support their group by adding more of what you do?

We have a customer that installs accessibility equipment in people’s homes to help them age in place safely – a noble mission. They have a contract in place with Veterans Affairs (VA) in several states. Through understanding some of the VA’s challenges, they learned that the VA had veterans from other states in need. The customer then helped to support the VA and its veterans by expanding its geographical footprint. This ultimately led to installing more units, thus increasing the volume which drove up revenue. And as we know, increasing revenue can increase profitability.

More questions for you.  

  • Can you increase the number of units, services, or hours you are selling to existing customers, and how? 
  • Can you offer a different service to your existing customers that will add value in a new way? 
  • Can you enter into new geographic markets and offer value to new customers?

3. The next driver is Direct Costs or Cost of Goods sold. These are the costs that are directly related to producing your revenue. They are your raw materials or your direct labor. These costs are variable with revenue so if revenue goes up then these costs will typically increase as well. But is there a way to decrease them?

Here are a few thoughts on reducing COGS to increase profitability:

  1. Stop making products that don’t sell. There are carrying costs such as warehousing, insurance, and transportation that are tied to this. Get rid of old inventory and stop making it all together.
  2. Negotiate with everyone. Work with your suppliers and look for volume and payment discounts. Also, periodically shop around for other suppliers that might be able to deliver the same value but at a lower cost.
  3. Automate your processes. Maybe you can use a just-in-time inventory system. Or maybe you can create efficiencies by reviewing your purchasing process which will add to cost savings.

The things to consider here are…

  • How you can drive these costs down while still being able to deliver value to your customer? 
  • When was the last time you took advantage of pricing or volume discounts? 
  • When was the last time you negotiated on your pricing?

4.  The next driver is Operating expenses. These are overhead-type costs like rent, insurance, general and administrative costs, software costs, and general salaries and benefits.

This is an area where we have a bit more control than we think. See if revenue is down, there is still a way to hit your net profit percentage by understanding which expenses are necessary to achieve your goals and reducing those that might not be.

Over the past few years, businesses have been challenged in many ways with Covid, supply chain issues, and even finding good help. Further, on the customer side, folks have been much more cautious about spending due to the recession.

We have a customer that provides software directly to consumers in the form of subscriptions. Due to the market downturn, the customer was not hitting their revenue projections. However, they knew that their operating expenses should be 30% of their revenue (they have a budget), so they reviewed their operating expenses, and here is what they did.

  1. They ran a few different scenarios to determine the budgeted profitability by reducing overall operating expenses by 5%, 10%, and 15%. They determine that a 10% cut in operating expenses would still allow them to achieve their budgeted profit of 15%
  2. They went line item by line item through their operating expenses and asked the question, does this expense get us closer to achieving our goals? 
  3. They were able to side with which operating expenses to reduce or completely cut out of their revised budget and started managing against it.

By managing, reducing, and cutting out unnecessary operating expenses, you can achieve your profitability goals even without increasing revenue.

5. The final drivers relate to balance sheet items. Here we are focused on increasing the speed at which we collect on Accounts Receivable and decreasing the speed at which we pay vendors on Accounts Payable. Or possibly even increase the speed at which we pay vendors to take advantage of early payment discounts. 

These two levers are pretty straightforward and are pulled by your accountant. Here are some thoughts about increasing cash flow by pulling on these levers:

  1. Utilize a 13-week rolling cash flow forecast for visibility and decision-making (see NE Blog on this)
  2. Set goals and measure them weekly on AR collections; Have your accountant take ownership of them
  3. Review all of your vendors and see if they offer any early payment discounts that you can take advantage of

We have several customers that have leveraged our 13-week rolling cash flow forecast. This has provided tremendous opportunity and visibility into finding ways to accelerate cash flows.

3 Key Takeaways Related to Increasing Your Cash Flow and Profitability

If you want to build and grow your business, you need to make sure you are focusing on its data components. This will provide assurance that you are maximizing your profits, ultimately increasing your cash flow.

Here are three key takeaways:

  1. Make sure you have someone get into the weeds and understand the impact of the above-mentioned levers. In fact, we suggest completely delegating ownership of this to a capable person like a fractional controller. Functions like this will be in their sweet spot and they can take ownership of helping you to move the needle here (Refer to our blog on fractional controllers).
  2. Expect a positive return on implementing these exercises. We believe that expectations should be created and then you should drive toward those results. We suggest recalibrating your weekly scorecard with new goals and aligning your work to produce the results. Further, consider updating your financial projections based on the revised goals and the levers you are pulling (refer to our blog on financial projections).
  3. Lastly, start slow and go deep. Select one of these areas and have your team spend 90 days working on it. Take the time to see if your revised goals are accurate and if not, understand why. Once you have mastered one of the techniques and achieved the results you are looking for, only then move on to the next lever.

New Economy Team Members are Experts in Accounting for Entrepreneurs

If identifying ways to increase your cash or profitability 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 done, and done right.

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

Smalll business financial statements

Leveraging 3 Key Growth Startup and Small Business Financial Statements to Achieve Your Goals

In this article you will learn:

  1. What are the 3 key financial statements
  2. How to produce the 3 key financial statements
  3. Why they are important
  4. The top 3 ways to leverage the financial statements to achieve your goals

Why Do Growth Startup and Small Business Financial Statements Matter?

Let’s start with some statistics from the SBA.

  • 66% of businesses with employees will fail in the first 2 years
  • 50% of small businesses with employees will fail by the 5-year mark
  • 70% of small businesses with employees will fail by the 10-year mark

But why is this?

  • 82% experienced cash flow problems
  • 42% experienced a lack of market for the product or service
  • 29% ran out of cash 
  • 23% did not have the right team and place
  • 19% were outcompeted

Yikes, these stats are staggering and a bit scary. However, we believe that good financial statements will help you make smart decisions to build and grow your business. 

Before we move on, check out our several other blogs which address cash flow and team building here. They might give you some peace of mind.

Smalll business financial statements

What are the 3 Key Growth Startup and Small Business Financial Statements?

The 3 key financial statements are the balance sheet, the income statement, and the cash flow statement.

These financial statements should be provided in a timely manner (we recommend the 15th of the month for the previous month). It’s also important that they are accurate so we can use them to access the financial health of the business.

Here is a summary of each statement:

Balance Sheet

The Balance Sheet is a summary of the business at any point in time. It is a statement that shows all of the company’s:

  • Assets (cash & payable receivables)
  • Liabilities (debt & accounts payable)
  • Shareholders’ equity

This financial statement assists the reader with determining things like the company’s ability to meet its debt obligations, the cash reserves in place, or amounts owed to the company in the future.

Income Statement

The Income Statement is a statement that shows the profitability of a business over a period of time. It entails all revenue generated by the business, less direct costs, less operations expenses to determine net income or loss. 

This financial statement assists the reader in determining things like gross profit, net profit, and even certain marketing expenses needed to support revenue generation.

Cash Flow Statement

The Cash Flow Statement tracks the sources and uses of cash over a period of time. 

This financial statement assists the reader in determining where the cash went, such as paying down debt or having it tied up in accounts receivable.

How Are These Financial Statements Produced?

There are a few things that come into play to produce the financial statement. We believe the keys are:

  • People
  • Process
  • Technology 

People

In terms of people, you want to make sure you have the right people in the right seats. Typically, a bookkeeper or accountant does some of the tactical work to start the foundation of producing these financial statements. They will focus on the categorization of expenses, the reconciliation of the bank account, credit card account, and all other basic accounts. 

Then a controller-level person would step in to work on some of the more complex parts of the financial statement like revenue recognition and properly matching up revenue and expenses which is important to have a clear and accurate financial picture of the business. 

Note: Use this article to help you spot the difference between an accountant, controller, and CFO.

Process

As for the process, it is key to getting the desired outcome month over month; from doing the basic categorization all the way to the month-end close. These processes should be documented and examined for efficiency. 

This will ensure consistency and accuracy in the production of the financial statements and plays an important role in the delivery of timely and accurate financial statements.

Technology

As it relates to technology, these financial statements are typically produced automatically in accounting software like QuickBooks Online or Xero. 

Note, there is a bunch of work that goes into producing these financial statements, even though they are automatically generated, which is why people and processes are important. However, the overall technology is pretty powerful and inexpensive.

 

Why Are These 3 Key Financial Statements Important?

We believe they will help you to become a stand-out instead of a statistic. The above-mentioned failure rates are scary and staggering. 

But fear not. 

We believe that these financial statements, and gaining control of them, will help you to make smart decisions to build and grow your business. So no more running the business based on your gut. You will have actual data to support decisions around “Can we afford to hire?” or “Should we invest in this marketing campaign?”. 

We have helped many entrepreneurs. No more confusion. No more sleepless nights. Just peace of mind by leveraging these 3 key financial statements.

Top 3 Ways to Leverage the Financial Statements to Achieve Your Goals

1/ Compare your monthly profit and loss statement to your budget. 

This budget versus actual analysis will help you to determine if you are on track or off track with your annual financial goals. The good news is that if you are off track you know early on and you can create a plan to get things back on track.

2/ Review your monthly balance sheet over a period of time for trend analysis. 

Specifically the cash account. Set a goal around building up your cash reserves to cover a few months of expenses like payroll. Then each month review the cash balance to ensure that the cash balance is increasing month over month to support your financial goal of building cash reserves.

3/ Review your monthly profit and loss and drill down on the actual gross profit percent. 

This is the profit you are making on the goods or services you are selling. Consider creating the ideal gross profit percent and create a plan like increasing prices or negotiating supplier costs to reduce costs and watch this gross profit increase over time.

Smalll business financial statements

Achieve Your Goals with New Economy CPA

Mining value from your financial statements can help you achieve your goals. 

At New Economy, we help entrepreneurs gain control of their finances and make smart decisions by producing and analyzing the information provided in the three key financial statements. 

With our help, you’ll have financial peace of mind. 

We hope this article helped you better understand the three key financial statements, but we don’t want to leave you empty-handed. Try out this free Cash Flow Projection Tool for help managing your cash flow.

How to Create and Follow a Cash Forecasting Model

To help you understand how to create and follow a cash forecasting model, let us paint a picture for you. 

The Hero

Every hero has a story. And we are big fans of the hero. You are the hero in this story. 

Picture yourself as Luke Skywalker. 

You are the entrepreneur working really hard and doing amazing things. You have guts, passion, and are willing to put it all on the line. We understand where you are coming from and have tremendous respect for you. 

But we also understand that it’s not easy. 

The Problem

In every story, the hero has a problem to solve. Some are more challenging than others, there is a problem we see over and over again. 

Entrepreneurs:

  • Don’t have the financial visibility to know when cash needs will arise
  • Don’t know how to be proactive to avoid these needs 
  • Don’t have the time to pull the information together
  • Don’t have the unique abilities to work through the issues

This is your Darth Vader and it can have massive implications on your ability to build and grow your business. Nobody wants to run out of cash.

The Guide

Another essential aspect of a good story is a guide.

New Economy, with its team of experts, financial tools, and trusted processes, is grateful to play the role of the guide. 

We want to help you solve the problem. We want to help you succeed. We are your Yoda.

In this article, we’ll take the opportunity to explain how we can help you solve this common problem i.e. get rid of your Darth Vader. Specifically, we’ll talk about the importance of visibility around cash flow and the projection tool we use to help our heroes become triumphant. 

The Cash Forecasting Model aka The Tool

Here at New Economy, we believe that entrepreneurs need a tool to see their cash flows out into the future. We like to provide this visibility over a rolling 13-week period. 

Our tool is very easy to use and is accessible by way of Google Sheets. 

It’s our goal to start simple and solve the problem at hand (lack of data for visibility and decision-making), only then will we introduce automated technology and dig deeper into your finances.

You can check out our free cash flow tool here

Getting Started with Your Cash Forecasting Model

Before diving head-first into your cash forecasting model, you need to do some planning, investigating, and info-gathering.

This can be a time-consuming process, so be patient and give it the time it needs, ensuring your records are thorough and complete. Keep in mind, hard work now has the possibility to make massive impacts on your business and help you sleep better at night :). 

Here are some simple steps you can take to get started:

  1. Analyze historical spending
  2. Understand spending needs
  3. Cut, reduce, and extend payments
  4. Identify cash flow gaps
  5. Identify solutions to cash flow gaps

As you gather this information, you’ll need to get deep into the “weeds”. Look at your accounts receivable and accounts payable journal and take a close look at historical bank statements since we are talking about cash. These are the source documents that will be utilized to build out the tool. 

We always advise clients to be detail-oriented because the more information you include in the tool, the better your results will be. 

The above data will be utilized to show the cash in and cash out needs of the business. We will be leveraging the historical results to predict the next 13 weeks. 

A great start is to sign up for that cash flow tool noted above which will walk you step by step through the process of building out the tool.

Your Transformation

Nailing down a cash forecasting model comes with plenty of benefits. You’ll gain stronger business processes and intelligence around:

  • Cash collection acceleration techniques
  • Proven effective collection policies
  • Proven effective credit policies
  • Proven effective payment policies
  • Building cash reserves
  • Preparedness on meeting obligations before they occur

Remember when we said a well-built cash forecasting model will greatly impact your business and help you sleep at night? 

We meant it. 

Ending with Success

What does success look like in your story? If gaining financial security establishes itself as a success indicator for your business, our team at New Economy has you covered. 

With our help, we’ll work to help you get the feeling of financial security based on the ability to predict cash flow needs. 

You’ll be able to: 

  • Know when, where, and how your cash flow needs will occur
  • Know the best resources for meeting cash flow needs (Debt, Equity, Factoring)
  • Prepare to meet those needs in advance
  • Set goals for building cash reserves
  • Set goals for paying down debt
  • Improve collection processes and techniques

Your success is important to us and as a recession looms, cash forecasting models need to play an even larger role in your financial management processes as they can prepare your business for what’s to come. 

If you want to learn more, schedule a time to meet with Jeff, the Founder of New Economy! We help entrepreneurs gain control of their finances to make smart decisions to build and grow their businesses.

We’d love to be a part of your story.

Use Efficient Data to Reach Business Financial Goals

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!

Prepare for a Recession with this Cash Flow Projection Template

Unfortunately, a recession is on the horizon and if you want your business to weather the storm, it’s time to start preparing

 

At New Economy, we have 5 strategies we suggest focusing on to get through this tough time. Each strategy is important but you’ll soon realize that managing your cash lands high on the list. 

 

We’ll explain more below and let you know how you can use our cash flow projection template as a tool for success. 

Use These 5 Strategies to Weather the Storm of a Recession

1. Manage Cash Well 

Cash is the lifeblood of every business. This means managing it well is essential for survival. Here’s how our team at New Economy suggests you manage your cash:

Plan and Process

Your business needs a solid plan and fool-proof processes to properly manage its cash. You can do this by:

  1. Analyze historical spending
  2. Understand spending needs
  3. Cut, reduce, and extend payments
  4. Identify cash flow gaps
  5. Identify solutions to cash flow gaps

Transformation

The way your business is managing its cash now may not be sustainable through a recession. You’ll need to build stronger business processes and intelligence around: 

  1. Cash collection acceleration techniques
  2. Proven effective collection policies 
  3. Prove effective credit policies
  4. Proven effective payment policies
  5. Building cash reserves 
  6. Preparedness on meeting obligations before they occur

Ending in Success

Properly managing your cash is an ongoing process, but eventually, you’ll earn a feeling of financial security based on your ability to predict cash flow needs. To create this feeling, you’ll need to: 

  1. Know when, where, and how your cash flow needs will occur
  2. Know the best resources for meeting cash flow needs (debt, equity, factoring)
  3. Be prepared to meet those needs in advance
  4. Set goals for building cash reserves 
  5. Set goals for paying down debt. 

2. Know Where Your Business Stands – No Sugar Coating

As a business owner, you need to have a strong pulse on your business. This means diving deeper into a few key areas to ensure the needle is moving in the right direction. 

 

Not to be overlooked, the health of your team and culture play a major role in the success of your business. Team members need to be on board and understand how their work plays a larger role. 

 

Keep a close eye on your goals as well. Regularly take the time to ask yourself if you are on or off track with your goals and one-year plan. Understand why and what needs to change to get or keep the business on course. 

 

To no surprise, analyzing financial performance is key to understanding where your business stands. Are you meeting key targets, like: 

  • Revenue? 
  • Gross profit?
  • The budgets for operational costs?

 

Dig deep to know where you are at and what may need to change. 

3. Turn Up Your Leadership

Companies rise and fall based on leadership. Your role as a business owner is to serve as a leader for your team. 

 

Here are a few of the ways you can become a stronger leader

  • Give clear direction on the vision
    • Create openings and opportunities for the team to connect. Be compelling and bang the drum. 
  • Provide the necessary tools for the team
    • They’ll need training, technology, and most importantly time and attention to help the succeed.
  • Act with the greater good in mind
    • One of your roles is to focus on long-term outcomes. Help your team understand how their work now impacts the greater good of the company. 
  • Keep expectations clear and communicate well.
    • We can’t stress this enough – communication is key! 

4. Run Scenarios 

There are plenty of different directions your business could turn in a recession. To best prepare, you need to have the ability to do “what ifs”. Scenario planning, aka financial modeling, offers you the ability to get a glimpse of potential outcomes for your business. 

 

With good financial modeling, you’ll get future visibility by month to make decisions. 

 

Our advice: Play with the assumptions to determine the outcome. For instance, lower your revenue by 10% to see the implications on cash flow and profitability. Perhaps then, you reduce your operating expenses to achieve the same profit margin. 

 

Again, understanding where your business could be headed will help you make quicker, more educated decisions. 

5. Find Opportunities 

Just because a recession is typically a negative experience, it doesn’t mean there aren’t hidden opportunities. 

 

For example, layoffs are abundant, but this also means there is top talent being let go. Look for that talent and add them to your team. 

 

You may also run into a business that is not adequately prepared or is struggling. This may provide an opportunity for a merger or acquisition. Keep your eyes and ears open. 

 

Other struggling businesses may not be serving their customers well, providing you an opportunity to acquire new customers. 

As a reminder, our team at New Economy helps entrepreneurs gain control of their finances to make smart decisions to build and grow their businesses. 

 

One of our favorite tools to use to do this is our cash flow projection tool. It will help you understand how to plan your budget in advance and see how much money will be coming in and out over time. You can grab it for free here.

If you have any questions or would like assistance in preparing your business for a recession, schedule a call with our Founder, Jeff! He’d love to learn more about your business and explain how New Economy can help!

What Will it Cost me to Outsource my Accounting?

Outsourcing accounting is trending in the business world. 

Depending on the role you choose to outsource, entrepreneurs reap many benefits, like: 

  • Accurate and timely financial insight
  • Strategic support and guidance
  • More time to work on the business instead of in it
  • Cost savings

If you’re exploring this option for your business, one of your primary questions is most likely, what will it cost me to outsource my accounting? 

The following article will answer this question based on New Economy’s numbers so you can have a rough estimate of the total cost savings you’ll receive from outsourcing your accounting. 

Know What You Need

Before you begin to think about the cost of outsourcing your accounting, you need to be clear on the kind of service you need, whether it be an accountant, controller, or CFO. 

Each service has a different function, so you want to make sure you’re outsourcing based on your needs. 

An accountant is tactical in nature and takes care of the basic financial management that is required for compliance and business success. 

A controller is a bit more experienced and typically leads the accounting staff. They’ll have more insight into your business and have the ability to make operational improvements to your financial system. 

A CFO is a strategic partner and will work with the CEO to perfect the business model and ensure the business is meeting its financial goals. 

For more detail about each role, check out our article on the topic. It’ll help you select which service is the right fit for your business so you can properly outsource your accounting. 

Let’s Define the Cost Savings (Sorry for the data and detail, we are number crunchers!)

The cost of hiring a full-time employee can pile up, and this is before you even think about the time and salary. 

However, outsourcing your accounting to New Economy offers plenty of cost savings in a few key areas. 

Training Investments

IT and Technology

  • We cover all of the IT and technology investments which is roughly $5k per employee each year. 

Fringe Benefits

  • We cover all of the fringe benefits including payroll taxes, 401k match, and health insurance. To put this into perspective, this means we are investing between $15K-$20k per employee each year based on a $75k salary. 

Management Time

  • We cover all of the management time on each account which can be a bit more challenging to quantify. However, you are now valuing your own time. 

So as you can see, New Economy covers anywhere between $25k-$35k in costs that, when you outsource your accounting, you do not have to assume. And keep in mind, these numbers don’t include salary. 

Before we Jump into Salary, Consider the Time that You Need

When you take into account the costs above and include a salary of $75k per year, you’re now shelling out anywhere between $100k-$110K for a full-time employee. However, this begs the question, do you really need a full-time employee? 

We are learning that many internal accounting hires are pulled into operations or admin work. When this happens, they are being overpaid and under-challenged. And you run the risk of losing them.

To avoid this, you need to understand the true time needs in accounting. This will reduce your investment in this area. 

For example, a full-time controller could cost between $80K-$125K, but if you only need a 50% schedule, your cost will reduce dramatically. 

Now onto Salary, Keeping in Mind we are Focused on Growing Small Businesses and Startups

Let’s take a look at the typical salaries for hiring full-time: 

  • A new accountant can cost anywhere from $55K-$65K
  • An experienced accountant can cost anywhere from $65K-$80K
  • A Controller can cost anywhere from $80K-$125K
  • A CFO can cost anywhere from $125-$200K

In our experience, most growing small businesses and startups don’t need full-time accounting help. 

So the true cost savings of outsourcing your accounting while still obtaining top-tier talent would be: 

  • $25K-$35K on technology, training, and benefits
  • 20%-30% of the salary by leveraging the team member in their unique ability and removing all admin and operational type work

Interested in Outsourcing Your Accounting to New Economy? 

At New Economy, we believe outsourcing is a great way to help you gain control of your finances to make smart decisions to build and grow your company. 

Our team comes from a great culture where they are nurtured and developed and we are proud of the awesome service they deliver. 

Based on the above, you can see that there can be significant cost savings in outsourcing your accounting.

If you are interested in learning more about our service, reach out to us today!

Do You Know the Difference Between an Accountant, Controller, and CFO?

Accountants, controllers, and Chief Financial Officers (CFOs) can all play an essential role in a finance department.

However, the size of your business, your business needs, and your business goals, will all play a part in determining which role you need to hire for. Making the right decision is crucial and can completely change the trajectory of your business. 

This article will touch on the importance of knowing the difference between an accountant, controller, and CFO and cover the key differences between each. 

Let’s dive in. 

Knowing the Difference is Important

Accountants, controllers, and CFOs all provide different services. Each role fills different needs within a company, so before you make a hire, you need to be clear on exactly what areas of your finances need attention and which role will best fit those needs. 

This will ensure you are bringing on team members who have the skillset required to meet those needs. 

Knowing the difference and choosing the right role before making a hire also ensures: 

  • You are not overpaying
  • You are not under-challenging or over-challenging the team member based on their unique skill sets as compared to the functions needed
  • You are building a solid foundation for your accounting team 

When you are clear on your company’s needs and hire the right person to match the role, you’ll see better results.

Let’s Cover the Differences 

Here is a general overview of the role of an accountant, controller, and CFO so you can be aware of the differences and make a hire that best fits your company’s needs. 

Accountant 

An accountant is someone that is tactical in nature. They do the groundwork and basic financial management that is required for compliance and business success.

Accountants handle things like: 

  • Bill paying
  • Payroll 
  • bank recs
  • Invoicing
  • Expense categorization 

An accountant will be under you or whoever is in charge of your company’s finances and will likely need supervision and training. They will handle the tasks needed to keep everything in order while maintaining and compiling the information you need to make financial decisions.

Controller

A controller is someone who is more experienced than an accountant and has a solid understanding of GAAP and the business. They’ll take the time to really understand your goals and use that information to improve your finance department. 

Controllers typically lead and manage other accounting staff as well as select and implement the processes your financial system needs to succeed. 

Your executive team will benefit from a controller because they deliver timely and accurate financial information. This information is typically derived from historical results which, as you know, can be very helpful and identifying trends and spotting issues before they turn into larger problems. 

Overall, a controller will have more insight into your business and have the ability to make operational improvements to your financial system when needed. 

CFO

A CFO is a strategic partner. They take on the higher-level role of managing your entire accounting department and its processes. Everything that happens within your finance department will be overseen by your CFO, including: 

  • Cash flow strategy
  • Business strategy
  • Creating budgets & forecasting
  • Oversee the entire accounting team

CFOs work closely with the CEO and have a strong understanding of the business and its goals. They spend time perfecting the business model and supporting the strategic direction of the company. 

You’ll turn to your CFO for advice on the basics like improving profitability and building cash flow but also for strategic support regarding organizational changes like mergers, acquisitions, and IPOs and negotiating vendor contracts. 

CFOs will also prioritize capital, ensuring your business has what it needs to fully execute its plans and reach its goals. They are skilled in building relationships with investors and are well-versed in capital-building strategies and can apply that information to best serve your business. 

Pick a Role That Meets Your Needs

While each role can make a massive impact on the financial health of your business, they are all unique. 

Before making any decisions, you need to lay out your needs and sort through the areas where additional help could be of benefit. From there, refer back to the roles of an accountant, controller, and CFO to determine which best fits your needs. 

Ensuring the people you hire fit into the role you are looking to fill is the best way to set them and your business up for success. 

However, if you’re looking for a more cost-effective approach than hiring an in-house accountant, controller, or CFO, consider reaching out to New Economy

We aim to help entrepreneurs gain control of their finances and make smart decisions by offering each of these roles for a much lower price than a full-time employee. 

We would love to meet with you and learn more about your needs so we can direct you towards the right role for you. Contact us today to learn more!