Proactively Preparing For Your Future Finances
BY DAVID PIERCE , CERTIFIED PETRA COACH
CASH
TO RUN a successful and scalable business , managing your finances regularly and accurately is critical . However , this doesn ’ t just mean reviewing your monthly profit and loss ( P & L ) report and calling it a day . You need a comprehensive understanding of how money flows through your business so that if ( or when ) your company comes across challenges , you ’ re prepared to face them head-on , and when opportunities arise , you can capitalize on them as well . So how can you start proactively preparing for your future finances today so you can achieve long-term success within your business ?
ANALYZE YOUR FINANCIAL TARGETS
When preparing your business for future financial success , it ’ s crucial to analyze and update your Targets regularly to identify your current standing . Here are a few of the staples to include in your dashboard :
• Gross Profit Margin : a percentage of total revenue indicating the profit left after subtracting the cost of goods sold ; gauges your company ’ s ability to pay for other operating costs ( sales and marketing , administrative , and R & D expenses ).
• Operating Cash Flow : the net amount of cash that an organization generates from its operating activities . This information is used to determine the viability of the core operations of a business , since positive cash flow is needed to maintain and grow a firm ’ s operations over time . Operating cash flow can be a more reliable indicator of financial health than the reported net income of a business since net income can be altered by noncash revenue and expense transactions .
• Budget Variance : calculates the difference between the budgeted amount and the actual cost ; evaluates how your company is performing financially compared to forecasted results .
CREATE A CASH FLOW FORECAST
Beyond identifying where your business is at currently , it ’ s important to look ahead as well using a Cash Flow Forecast .
A cash flow statement is your go-to document to understand the cash needs of your business and includes things like your cash outflows and inflows , investing and financing activities , and noncash expenses such as depreciation and amortization .
To maximize your cash flow , you first need to understand your company ’ s Cash Conversion Cycle , which is how long it takes for a dollar spent to convert back into a dollar earned . Next , optimizing your cash flow involves reviewing your expenses ( including variable costs , fixed costs , and other expenses ) and knowing the timing and amounts of revenue and expenses that affect your cash flow .
When creating a Cash Flow Forecast , you ’ ll want to prepare for multiple scenarios to help you act proactively rather than reactively . Work with your CFO or accountant to build short- ( weekly or monthly ), medium- ( quarterly ), and long- ( yearly ) term cash flow forecasts and be sure to review and revise your strategy often .
TRACK YOUR PROGRESS
The best way to stay accountable to your financial goals is to consistently track your progress so your goals stay visible and top of mind . Tracking your progress will help you identify the areas that are working and anything that needs to be adjusted .
These aren ’ t tactics you can just set and forget . The market and your customer ’ s needs are ever-changing , and consistently revisiting your strategy will help you respond and adapt faster to any obstacles that may impede the growth of your business .
KEY TAKEAWAYS
Understanding your financial Targets , creating a Cash Flow Forecast , and consistently reviewing and tracking your progress are key strategies for proactively preparing for the future of your finances . Although navigating the financial intricacies of running a business can feel overwhelming , following these steps will set you up to better manage your company ’ s cash flow , get through challenging financial times , maintain a healthy business , and keep scaling .
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