What Business Tools Are You Overlooking?
Most medium and small business owners think about the physical tools needed to run their business. These include:
- an office space,
- a software suite,
- the proper desk setup.
Many SME owners, however, overlook or DO NOT make time for two essential business tools. These business tools are intended to provide clarity in the business, and; enable prosperous growth. Two things that all businesses can do with!
The two business tools that every business should have are:
- Business Budget
- Cash Flow Forecast
Without these two business tools, the results are too much time spent trying to keep heads above water, not knowing where money goes every month. Most saying, “I don’t know what money I am making”.
As a result, it is easy to overspend and/or end up short on funds when it’s time to pay liabilities.
Business budgeting is where you develop a plan of how much money your business will spend (expenses) and make (revenue) for a given period.
Small business budgets can be prepared annually based on your financials from the previous year. When your business is new, however, you might need to rely on figures from your market research to make reasonable assumptions.
Here are some specific things a budget can help you do.
- Avoid over-borrowing
- Avoid surprise cash shortfalls
- Identify where to allocate your money and resources
- Determine when to hire employees and how much to pay them
- Know when you’re able to make investments, such as purchasing equipment
- Generate accurate financial statements that can be shared with lenders and investors
Why Your Small Business Needs a Cash Flow Forecast
Cash flow forecasting is different from business budgeting because it tells you how much money you are actually bringing in and spending. With a cash flow forecast, you’ll analyse historical data to identify trends that can help you predict how your business will perform in the future.
Unlike budgeting, which is typically done annually, cash flow forecasting happens regularly, typically every month or every quarter. That way, you can make business decisions based on the most up-to-date financial information, and adjust your budget as needed throughout the year.
Cash flow statements are a type of financial statement. A Cash Flow Statement includes Cash From:
- Opening Cash on Hand
- Closing Cash on Hand
Cash flow forecasting will help you identify how much money you are regularly spending. You can use this information to guide your business strategy, recognise when to invest in expenses, and avoid unexpected cash shortfalls.
It’s a good idea to get into the habit of forecasting as early as possible. As your small business grows, you may need to share it with lenders and investors. In addition, all publicly-traded companies are required to share high-level forecasts with their investors.
What Can Happen Without These Business Tools
Without business budgeting or cash flow forecasting, your business can potentially be left financially exposed. You may not have enough money to pay important bills or other liabilities such as tax or insurance. Some of the typical problems experienced by SMEs are shown below.
Without budgets or cash flow forecasts and a working accounts payable system you don’t fully understand who is owed money and when. Creditors are paid late, that’s if you can even pay them at all.
Meeting your superannuation compliance is an important part of managing your business. Missed or late superannuation lodgments may result in financial penalties. These may include forced payment, solicitor fees, and not being able to claim the expense as a tax deduction.
Staff Leave Entitlements
Putting aside appropriate funds for staff entitlements is important when managing your business. Without doing so you run the risk or financial or even legal liability. Business budgeting and cash flow forecasts help you determine the suitable funds required for Sick/Carers Leave, Annual Leave, and Public Holiday Leave. If you do not have the money put aside and may need to take out a bank loan, that’s if you can get a bank loan.
Business Activity Statement (BAS) GST
You collected all that GST; you paid some, but you spent the rest. When you are doing your BAS preparation you realise there is not enough left. Does this sound familiar? Maybe the extra money you thought you had pays for the car loan your partner drives or was a nice chance to “splurge” on a short holiday. The excuse of ‘without it you could be divorced’ will not be acceptable to the ATO!
Most of us are obligated to pay income tax. If you haven’t put these funds aside and end up with a massive bill from the Australian Taxation Office, this can cause immense stress. Your stomach sinks, you feel sick, and you want to run and hide, lay low, and hope it goes away.
Don’t Ignore Your Business Finances
You may have accrued so many liabilities, that you feel constant anxiety. It is important to take immediate action – don’t ignore the problem.
Overspending in your private life often affects the business too. Especially when your business is NOT yet making enough money to support all the luxuries you have taken upon yourself. Until you have a grip on your finances you MUST cut costs until you know you can afford them.
- If you can’t afford the cleaner or home gardener, stop engaging them,
- If you can’t afford those beauty salon visits than go without,
- Do you really need that new pair of sneakers? A bit of glue is much wiser, besides Our Earth doesn’t need more landfill!
- Must you upgrade to that new car you want right now? Keep driving your existing car a while longer.
Even though a budget is essential for all; companies, sole traders, partnerships, not for profits, whatever your business structure is, nearly half of small businesses in 2020 do not have one. Many small business owners do not have the knowledge to understand how to use their business data to develop accurate small business budgets.
The same is true for cash flow forecasting. Unfortunately, many small business owners feel they just don’t have the time to forecast every month.
However, if you want to grow your business, these tools are must haves. With a Budget and Cash Forecast, you can go from struggling to pay your bills on time to paying on time to having money left over. You can also have the confidence to hire more employees and make investments that will take your business to the next level.
The good news is that you don’t have to do budgeting and forecasting alone. We’re here to help! We’ll use our experience and expertise to create a budget and cash flow forecast that empowers you to grow your business. Contact us today to get started.