So how can I best forecast income and expenses?
Among the most valuable tools in this effort is the annual cash flow projection. With it, you can set realistic profitability goals, measure your progress toward those goals and head off trouble before it gets too serious.
To get started on an annual cash flow projection, use your general ledger’s income and expense account categories to budget cash inflows and outflows. You’ll be able to easily predict many routine, fixed expenses, such as facility rent due at the beginning of each month or semiannual insurance installments. Compare previous years’ figures to your current projection to ensure reasonableness. Your CFO or CPA should be able to prepare the projection, along with your guidance on specific projected changes in income and expenses.
My business is losing money. What quick fixes can I do to solve money problems?
In response to dire times, many business owners may look for quick fixes to tide them over until the economy recovers or at least until the next big customer or project comes along. Yet this thought process can be extremely dangerous — particularly when full economic recovery remains nowhere in sight.
Each situation is different. A business that is only recently losing money might be able to proactively make moves that will stop the bleeding, such as reducing employee hours, changing inventory purchase practices and reducing various variable costs. On the other hand, a business that is on the brink of closing its doors may need to downsize by moving or renegotiating its lease, selling assets, laying off employees and asking for extended terms with creditors, etc.
You should work with your financial team (CFO, controller and outside CPA firm) to identify reasonable approaches to improve accounts receivable collections and reduce fixed and variable costs. Since a CPA typically has experience with many companies in similar situations, he will likely provide some very viable solutions that you may not otherwise have considered.
Ultimately, you need to give serious thought to your business strategy when facing tough financial decisions. Although quick fixes may be tempting, they’re detrimental without a well-thought-out plan to back them up.
Why is long-term thinking important in a recession?
When faced with less-than-desirable financial circumstances, you must think long term. While knee-jerk downsizing and cost-cutting may be your first instinct, they often aren’t the best options. Specifically, you must identify the driving forces of your business by asking questions such as:
- What are your company’s strengths and weaknesses?
- What is the economic state and forecast for your industry and market area?
- What variables affect your business?
- Where do you want to be in 10 years?
Through strategic analyses such as these, you may find, for example, that talented employees and technological innovations are invaluable to your company and are areas in which you must invest — even when money is tight. These analyses may also identify areas that are less of a priority where you can make effective cuts.
Jeff Hipshman is a partner at HMWC CPAs & Business Advisors in Tustin. Reach him at (714) 505-9000 or [email protected].
