How to avoid three common budget pitfalls
23 September 2014
Posted by: Author: Mike Sowinski (Entrepreneur Magazine)
Author: Mike Sowinski
Let me guess: Your profit and
loss (P/L) statement has been in the black for months, yet a quick look at your
bank statement tells you that you’ve got only enough money in the bank to cover
four, maybe six weeks of operation.
Don’t fret, my friend. I see this
narrative play out all the time.
The root of the issue is that
you’re basing the company’s health on its P/L statement, not on its balance
sheet. P/L statements show revenue and expenses, but only a balance sheet lists
everything a company owns and owes.
As a CFO, I usually find the
answers to cash issues buried in a complete balance sheet.
Here are some common places where
a disconnect can occur between net income on the books and actual cash in the
bank — and how to correct them.
It’s busy season and you’re
spending cash like water. Meanwhile, people who owe you money aren’t paying in
a timely manner (shocking, I know). For example, a builder needs to buy
materials and pay workers in the summer but won’t see payment until the houses
are finished months later..
The fix: Offer pre-payment discounts
if customers pay all or a large portion ahead of starting the job. Then be
insistent on getting paid. Sometimes a phone call is all it takes to move your
invoice to the top of their pile.
I worked with a golf course that
raked in money during the summer but had trouble finding the cash to maintain
the course in winter, when far fewer people golfed. Why? During the high
season, management forgot to prepare and budget for expenses that would occur
during the off-season.
The fix: Pay for materials needed
for the off-season during your flush months, and ask for a pre-payment
discount. That’s what we did at the golf course, buying fertiliser at a reduced
cost ahead of the quiet season.
New companies tend to go on sprees,
buying furniture, computers, equipment, even buildings to ramp up production,
set up new offices or expand. And poof! Just like that, there’s no cash for
day-to-day operations. I once had clients who poured all of their money into
purchasing a warehouse and were in a world of hurt when they needed cash and
the banks said, ‘No way.’
The fix: Finance or lease
everything you can, matching the asset’s life with the term of the debt. That
way, three to five years later when, say, a computer is out of date or a
machine wears out, you can immediately turn around and upgrade to new
These are just a few of the ways
a seemingly profitable business can run into a cash crunch.
To avoid these scenarios, get
help from an accounting pro to build a financial model that shows you the whole
picture, not just your P/L.
The truth it reveals may sting,
but the pain will pass when you’ve got the cash in hand.
This article originally appeared