Weathering the ups and downs of your business’ finances.
We asked local financial advisors about the importance of budgeting and what you can do when your business inevitably faces financial hardship.
Questions:
1. How can smartly handling inflow of cash help with dips in cash?
2. How can a cost analysis avoid a cash flow crisis?
3. How can you prepare for the inevitable dips?
4. Is there a strategy that offers budgeting breathing room?
Ted Massaro, CLU, AEP (pictured)
President
M Financial Planning Services
1. Prepare and maintain a cashflow forecast. If you have unexpected new funds coming in, allocate a portion to your emergency reserve (goal being six months of expenses), then consider reducing or eliminating high interest debt.
2. Cost analysis or budgeting is an effective way to determine if you have sufficient income to cover ongoing operating expenses as well as identify how much of a cushion you have each period.
3. By allocating room in your budget to set aside reserve funds to prepare for the unexpected. If there is no excess available to build the reserve, the reality is you are spending beyond your means.
4. Building out a budget once a year and reviewing it monthly will help to keep you on track, and give you the chance to identify any red flags that need to be addressed.
Michael Pucciarelli, CPA, CBA
Principal
HBK CPAs
1. Know when the shortfalls in cash will take place during the year. When cash flow is strong they need to ensure they are reserving funds for the shortfall periods. [Do this] by setting up a savings account or short-term investment account so the funds aren’t utilized until needed.
2. A cost analysis [provides] an idea of what their fixed and variable overhead costs are in their business. Having this knowledge will enable them to perhaps rely on more outsourcing of people or processes so in the the slow cash months they can limit these expenditures.
3. By reserving cash. A business can also set up a line of credit with their bank so they can draw down on the line of credit in the slow months and payback the line in the months they are flush with cash.
4. There is not one strategy. Managers need to be diligent in monitoring all the Key Performance Indicators in their business during the year in order to be flexible and proactive to plan through slow cash flow periods.
Gary DeVicci, MSFS, CFP
President-Advisory Servicse
CPI Companies and PolicyAudits.com
1. Every business looks forward to the transaction that provides cash flow exceeding current needs, and always has a list of wants. Anticipating upcoming expenses and allocating current windfalls helps minimize potential problems from impulse spending.
2. Typical cost analysis measures potential expenses against potential revenue. If you address these within a careful timeline, you get a forecast of any periods with cash flow shortages.
3. A prerequisite to being a successful entrepreneur is being optimistic. This optimism must be tempered with continually monitoring of where reserves can be had “if” (read as “when”) dips occur.
4. In the cost analysis, it is helpful to have high and low projections for revenue and expenses. If a low projection for revenue doesn't fail when coupled with a high estimate for expenses, there is breathing room and a high probability of a successful outcome.
Published (and copyrighted) in South Jersey Biz, Volume 5, Issue 5 (May, 2015).
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