In my years as a CPA, I am have been involved with literally hundreds of businesses. They have been of every type from wholesale and retail to professional to manufacturing. I have seen very successful businesses and, unfortunately, I have witnessed companies go out of business. I have also seen every type of business in between the two extremes. There are many management styles, innovations, inventions, businesses with many clients and customers and businesses with few clients or customers. The one common denominator between success and mediocrity or worse, failure is the ability of the business to manage cash flow and taxes in accounting.
It is my experience, that most business owners believe that the successful businesses have the most volume and customers. This is certainly a key component to success. However, it is what and how the business owner utilizes the cash flow from their revenues that ultimately determines the long-term growth and stability of their business. I think I can say this has surprised even me, and only through my observation and experience have a seen how proper management of cash flow is the key component to a business's future.
1) Unrealistic expectations regarding future results 2) No planning for current and future cash flows needs 3) No contingency plans and/or reserve for difficult situations of a specific business nature or an overall economic nature. 4) Lack of understanding of the overhead of the company
Let's tackle each pitfall and see how we can find a solution for the small business owners
1) Unrealistic Expectations Regarding Future Results
Many business owners perceive future results will either meet current results or exceed them. Business plans are then made based upon these expectations. A restaurant owner will have a good restaurant business and think of adding a second location, assuming things will go as well at the second location as the first. A manufacturer will buy an additional piece of equipment assuming sales are going to increase to require additional capital investment. A real-estate developer will start a new project, while working on a current successful project. The examples are endless. Truthfully, the future results almost never meet the expectations of the business owner. This inevitably leads to cash flow problems because the successful business is being sapped of cash by the new venture. The ONLY WAY to expand a business venture is to have a plan based upon ALL POSSIBILITIES, riot simply that business will always meet or exceed past results. A plan should be implemented that ensures there will be sufficient cash flow if things do not work out as planned. Enough cash should be available to withstand any type of economic or business condition. If an expansion or addition cannot adequately withstand a decrease in expected results, then more times than not, problems will occur.
The best method for evaluating cash flow needs is to use a cash flow projection worksheet, which I have attached to this report. The worksheet enables you to enter different scenarios into the worksheet My favorite method is use a best, average and least favorable methodology to determine what my future cash flow expectations will be. This will allow you to be prepared for all future possibilities regarding your business expansion.
2) No Planning for Current and Future Cash Flow Needs
Most small businesses operate by what I call "a seat of the pants philosophy", when it to taxes and accounting. Namely, they don't utilize any planning tools adequately anticipate and manage their cash flow needs. As an example, take a business I am very familiar with, a CPA firm. Everyone knows a CPA has their best months during tax season, namely March and April. The end of the year is usually the slowest period because all tax returns and audits have been completed for the previous year and the following year's work has not begun. Clearly, strategy is needed to build reserves of cash from tax season to maintain cash flow for the end of the year. If we did not do this, we would run out-of money at the end of the year. We are an example of a business that has a large seasonality component. Most businesses have these high and low periods during the year. A cash flow projection is the most useful way to adequately plan for cash flow needs. I have attached an example of such a worksheet in Appendix I.
3) No Contingency Plan and/or Reserve for difficult situations of a specific business nature or an overall business nature.
Every business should a set-aside reserve for difficult or unforeseen situations. I my experience, the businesses that have such a reserve are the ones that have long-term sustainable success and those that do not continue to struggle. In any industry, there will be ebbs and flows in the business cycle. There will almost always be a consolidation of entities in an industry during difficult times. The business's that can weather the storms will be those that have long-terra success. They will even end up more successful than they were before the downturn in business, because after the consolidation they will get some of tine business from those companies that fell by the wayside.
Most businesses should keep a cash reserve of 4 to 6 months at all times to pay for expenses and taxes. Not only can these reserves be used during a cash crunch, but they also enable a business owner to take advantage of business opportunities that arise. For example, if your business uses commodities for production of products, prices for this commodity will fluctuate throughout the year. If prices drop during the year enabling you to purchase bulk amounts at low prices, cash reserves will enable you to do so. It is hard to believe, but when I get involved with businesses, all successful businesses maintain an adequate cash reserve.
4) Lack of understanding of the Over head of the Company.
In order to foresee current and future cash flow needs business needs to have a firm grasp of the their total costs. Many do not. They think they understand their cost structure, but most of the time it is a loose estimate of their costs that many vary from month to month and year to year. It is very difficult to plan for future cash flow needs if a business does not understand their payroll requirements, capital expenditure requirements, insurance expenses and most expenses the company incurs. If you want to increase your profitability, you need to keep your eye on your overhead and look to decrease them. In fact, decreasing overhead is often considered to be the easiest way to increase net profit numbers.
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Andrew Btdy is author of this article. To know more about Tax Preparation Miami and CPA in Miami, Please visit this link Accountants in Florida.
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