Archive for category Uncategorized
Although formal budgeting and forecasting are thought to be reserved for, and only needed by “BIG Business”, they are important tools in growing your small business too. We often think of budgets as very time consuming to develop, complicated and we may even think of them as a waste of time. But before you write them off as worthless, let’s explore what they can do for your business. We’ll also look at 5 budgeting tips to help drive your business down the road to success.
Do I REALLY Need a Budget?
One of the reasons that small businesses fail, is the failure to plan. Market conditions, new competition, the outcome of the coming presidential election, the weather, the rise and fall of interest rates. These, among many other factors, can have significant impact on our businesses. Yet, for the most part, we have little to no control over them. Having so little control over critically important factors that can determine whether our businesses succeed or fail can be frustrating to say the least and may tempt us to throw up our hands in surrender. But I’m here to tell you that having a plan, a solid budget, that is well thought out and flexible can help you navigate your business through stormy and uncertain times. No, it’s not your crystal ball and no, you don’t need a crystal ball to prepare one. Think of it this way, trying to run a business without a budget is like trying to sail a ship without a map. You can do it, it’s just much riskier. You may hit an iceberg before you realize that there’s an iceberg in your path.
5 Budgeting Basics
Your budget is your map to the future. You know where you are today. Right? But where do you want to be in the future, say 12 – 18 months from now? And, once you figure out where you want to be, how will you get there? That’s where your budget comes in, it’s your map.
1. Take Inventory of Your Environment
Knowing the environment that your business operates in and anticipating the changes that may happen to this environment will help you make sure that your budget (your map) is well thought out. You may decide in this step that you need to make a change to your business. Now’s the time to consider this. In this step, take stock of the significant risk factors that may affect your business. Consider the impact on your business of an increase in the minimum wage, changes in the interest rates, new technology, and the entrance of new competitors. This is the landscape of your map.
2. Determine Your Destination
Now that you’ve taken stock of your environment and you know the risks you’ll be facing, take a deep breath and determine whether you want to plan to grow your business. If growth is where you want to be, quantify what that means to you. Does growth mean an increase in customers, increase in revenues/sales, launching a new product or increasing your profit? Consider this your destination.
3. Sketch Out Your Sales Volume and the Driving Forces Behind Your Sales
If your destination is to grow your business, determine where this growth will come from and how it will impact your sales volume and revenue. If you’ve got historical experience in sales and proven marketing strategies, you can leverage this information to help you prepare your map to the future. Although this is a good strategy, I would caution against strictly using historical performance to forecast future results. Always consider your environment inventory when determining your projected sales and revenue growth. If possible, prepare “best”, “worst” and “most likely” cases. This will help you see the impact of changes in sales volume on your business and you can track your actual results to these cases. This will be your main road on the map to your destination.
4. Plan for Your Expenses
Now that you know what your sales plan will be and how you intend to reach this goal (marketing, acquisition, new product launch, etc.), you can start layering in the expenses that will be incurred to drive your sales volume and your business operations. Things to consider here will be marketing spend, sales commissions, purchases of product to sell, costs to develop new products, salaries, taxes, rent, utilities, supplies, dues and subscriptions. You get the picture. Here again, if you’ve got historical data to work with, that would be great and will help to make sure you don’t leave anything out. Regardless, I would highly recommend adding in a percentage of your revenue or a flat amount as a cushion for the unknown. This is the construction materials that go into your main road on the map to your destination.
5. Communicate Your Plan & Consult It Regularly
Communicate your budget (road map) to your staff or other stake holders. Get their input and revise it as you see fit. Your budget is your map to the future. Don’t put it down on paper and file it away, take it with you as you journey to your destination, it will help you stay on track and succeed. Use your road map and it will guide you to success!
There you have it! 5 budgeting tips for your success. Now go out there and budget with confidence.
© Susan M Nieland, CPA
So, what does it take to succeed as an entrepreneur? Just ask anyone and they will tell you anywhere from three to thirty things you need to know in order to succeed.
- You need a great PRODUCT that people (your customers) want to buy.
- You need lots (and lots) of MONEY to fund your company and develop your idea into a product your customers want.
- Your timing needs to be impeccable.
- You need CUSTOMERS (hopefully lots of them)
- You need EMPLOYEES (good employees if you’re lucky enough to find them)
- You need to know your numbers and be able to recite them at will
Sound familiar? I know, this is not only a short list, it’s obvious and everything you’ve heard before. But, something is missing. What? Character. The character of the founder, the entrepreneur. I’ve worked with, talked to and observed many entrepreneurs throughout my 25+ year career. One trait that I’ve noticed that most of these CEO/Founders had in common was strong character and a will to succeed. They persisted. They never gave up. One CEO/Founder that I worked with had an idea to turn the payments industry on its ear and create something new. Trying to revolutionize an industry that began more than 100 years ago and was well established is an undertaking that most people would never have thought of, let alone attempted, but this founder took it on. The road was rough to say the least. Designing and developing a prototype system, convincing investors that it could work, finding the right partners to work with you in creating the system and enticing employees to come work for you at your startup. A road fraught with obstacles and challenges. And, at every turn, the temptation to give up and quit. This founder never gave up, he fully believed in his idea and kept moving forward regardless of how many times it appeared as though failure was just a step away. You see, his unwavering character pulled the company through. It was eventually sold to a major credit card company in a multimillion dollar deal. Success!
This is just one story, but there are many more you can draw from to inspire you to continue on and keep going. If you look at the great successes of our time, they didn’t let failure get in their way of success. Let’s take a look at what some of them have said:
- “Many of life’s failures are people who did not realize how close they were to success when they gave up.” Thomas A. Edison
- “Failures, repeated failures, are finger posts on the road to achievement. One fails forward toward success.” C.S. Lewis
- “Success is often achieved by those who don’t know that failure is inevitable.” Coco Chanel
- “For every failure, there’s an alternative course of action. You just have to find it. When you come to a roadblock, take a detour.” Mary Kay Ash
- “I’m convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure perseverance.” Steve Jobs
- “Do the one thing you think you cannot do. Fail at it. Try again. Do better the second time. The only people who never tumble are those who never mount the high wire. This is your moment. Own it.” Oprah Winfrey
If you fall down, get up. Keep falling down and getting up until you figure out why you fell down so that you can learn to stand and not fall. Persist and you will succeed. It may not be what you originally envisioned success to be, but it will be success.
Thank you for reading, please leave me a comment to let me know what you think.
Susan Nieland, CPA
When you see headlines like “DOW to Drop 80% in 2016” as a small business, startup or early-stage company you may wonder “will my company survive?” Good question. Here’s where your tried and true forecast comes in prepared with the assistance of your trustworthy CPA.
You may think that your company or organization is too small to worry about developing a financial forecast. Dr. Anandi P. Sahu points out in his post on forecasting that the “long-term success of any organization is closely tied to how well management of the organization is able to foresee its future and to develop appropriate strategies to deal with likely future scenarios.” Many business owners, especially owners of small, startup, and early-stage companies, like to use “gut feel” or the “back of the napkin” forecasting approach. Now, there certainly is nothing wrong with these approaches, but they generally don’t provide you with the flexibility needed to meet changing markets and economic conditions. Which is what you need to effectively run your business and grow. Having the right forecasting tool(s) can go a long way to ensuring your success as a business owner and manager.
Ok, so we’ve got to have a forecast. How do we go about doing this? Good question. As I’m sure you are aware, there are various forecasting methodologies that can be used to create your forecast. For these, I’ll refer you to Dr. Sahu’s post on forecasting which is very informative and explains each of the different forecasting methodologies. What I want to bring to light here is the need to have a solid forecasting model, whether this model is Excel-based, or built in a sophisticated forecasting software. The best way, that I have found in my experience, to have a solid financial forecast is to ensure it has these key attributes:
- It follows generally accepted accounting principles (GAAP) as much as practical. This will allow you to compare your actual results to your forecast easily.
- You capture the attributes of the key drivers of your business whether that be inventory turnover, product sales, customer acquisition costs, recurring monthly revenue, revenue per customer, or another meaningful variable that drives profitability and growth.
- It is flexible; you have the ability to change the values of your key drivers so that you can “see” the effect certain decisions may have on your business.
There you have it, your forecast should follow GAAP, capture your key business drivers and be flexible.
Susan Nieland, CPA
I hear you! You’re sitting there saying “I’m small business; I care more about the balance in my bank account than I do about financial statements, income statements and balance sheets; GAAP. GAAP, whatever that is, is for those “big guys” that have lots of investors, tons of money and have to report to the SEC. It’s just not for me.” I beg to differ though; GAAP, Generally Accepted Accounting Principles, are for you! Read the rest of this entry »
A CPA? What do I need one of those for? What value can they add to my business? They just want me to follow a bunch of accounting rules that make no sense! All valid comments and concerns. If you are a small business, startup or early-stage company, you look at the balance in your checkbook and may have a hard time figuring out what value a CPA could add to your business let alone how you could afford one.
Looking to grow your business? If so, you’ll need capital. Capital that most likely will come from outside investors, venture capitalists (the “VC”). In a recent article, “Meet the man behind the rise of bots and our AI-driven future”, by Caroline Fairchild, the New Economy Editor at LinkedIn, Dennis Mortensen of x.ai, a startup and creator of the Amy Ingram artificial intelligence driven personal assistant, points out that “once you sit in a room [with the investors] and ask for $25 million, it is not about bold ideas; it is about spreadsheets.”
Why are spreadsheets important? It’s my idea, enthusiasm and well defined goals that will make it happen. What value do spreadsheets bring to the equation?
These aren’t just any spreadsheets, they are special spreadsheets, they are forecasts. These spreadsheets tell your story in numbers. Numbers that need to be accurate and realistic so that they are believable. Presenting a forecast that shows not only your projected income and expenses, but your projected assets and liabilities along with projected cash flows, combined with your great idea tells a compelling story to potential investors. Not only that, it shows investors that you are serious and have your act together, have thoroughly thought through your business model and are worthy of their investment. Spreadsheets. Something that most CPAs are not only familiar with, but are adept at creating and deploying. Having the right CPA on your side to ensure that you are presenting complete and accurate forecasts can help ensure that you get the deal done, your company off the ground or sailing to the next level of growth.
CPAs have the skill level and training needed to provide objective, strategic advice, as a result of the rigorous educational training, including ongoing continuing education requirements, combined with years of experience. Held to high ethical standards and a stringent code of conduct, CPAs must meet high levels of competence and professional standards in order to serve individuals and businesses. Trustworthy, hardworking, diligent and objective, all qualities to look for, and expect, in your CPA.
Susan Nieland, CPA
We made it to the final stop! Is it time to actually recognize revenue now? Well, let’s see. What does it actually take to be able to recognize revenue? Satisfy your performance obligation(s). That’s what it takes. “What,” you ask, “does that mean?” Well, let’s look at what it means; let’s break it down.
Back at our second stop, we looked at what our performance obligations were and found that they represented what we’ve agreed to provide our customer in exchange for the contract price or sales price. Our performance obligation(s) could be as simple as handing over a pair of jeans that we’ve agreed to sell to our customer in exchange for their payment or as complex as delivering a software license with an annual maintenance agreement along with installing the software on the customer’s server.
Now, when do we recognize revenue? Our guidance, ASC 606, “Revenue from Contracts with Customers”, tells us that we “recognize revenue when (or as) the performance obligation is satisfied”. “How do we know when we’ve satisfied our performance obligation?”, you ask. When the customer has taken control of the good that we’ve sold or been provided the service we’ve promised, we have satisfied our performance obligation; completed our part of the deal. At this point in time we can recognize revenue.
Let’s take the example we looked at during our fourth stop a step further. In that example, you developed a software product and you license it to companies in the automotive industry. Your new customer is purchasing the software license, annual maintenance agreement, and 100 hours of implementation services for a total contract value of $75,000. Based upon the relative standalone selling price of each of these deliverables we allocated $44,118 of the total contract value to the software license, $22,059 to the installation services and $8,823 to the one-year annual maintenance services. Now the question is, when do we recognize revenue for each of these items? That depends on when each item is delivered to the customer and when the customer takes control of them. Let’s say that you deliver, via secure electronic file transfer, the software license to the customer upon contract signing and payment of 50% of the contract price. The installation services are scheduled to occur immediately after contract signing and will take approximately three weeks to complete. The one-year maintenance agreement begins immediately after the software license has been delivered. One thing that we need to figure out is do we deliver our goods and/or services at a point in time (once), or over time (as we complete work we deliver it to the customer or as we deliver our goods/services over time and the customer uses them as they are delivered).
Our recognition of revenue would look something like this:
This post is not intended to be all encompassing, but to just give you an idea of some of the complexities you may encounter in recognizing revenue for your company. As you can imagine, the effects of this new regulation can have a significant impact on your financial results, so I highly recommend that you seek out expert advice if you are in doubt or have complex customer arrangements.
This ends our journey down the revenue recognition highway. Thank you so much for joining me! Don’t hesitate to comment on my post or reach out to me directly with any questions.
Susan Nieland, CPA
CFO Solutions, LLC
Here we are again, back on the road to revenue. You’ll remember that we are working our way down the revenue road looking at ASC 606 (that’s accounting lingo for “Revenue from Contracts with Cust…