Are you running a business that is earning a profit this year? If this sounds like you, you’re likely pretty happy with the financials of your company. After all, being profitable means you have created a thriving entity and are doing well. But don’t kid yourself if you think you are the only one excited about the performance of your business.
Enter in, the IRS. Owning and operating a profitable business means that you must pay taxes. And no one likes your tax dollars more than the IRS—no one except you.
So unless you like the idea of the IRS doing a Scrooge McDuck dive into the tax dollars you have to pay out, it’s in your financial interest to take advantage of the tax breaks that are available to reduce the amount of taxes your business owes.
This Is How Tax Credits And Tax Deductions Are Different
While both tax credits and tax deductions can help minimize a company’s income tax liability, there are differences between the two. Tax credits are 1:1 reduction of taxes, whereas tax deductions are a percentage of dollars spent based on the tax rates and cut down your taxable income.
There are many tax credits your businesses may be able to take advantage of, below we have selected a handful you might not know about:
1. Federal Research and Design Tax Credit
Your business may be performing research and design (R&D) qualifying activities without you realizing it. The R&D tax credit (not to be mistaken with the R&D Tax Deduction) is a 1:1 reduction against taxes owed or paid.
Nearly every state also has its own R&D credit programs, most resemble federal rules and come in varying incentive amounts. So if your company is developing new or improved products or technologies, you could qualify for substantial tax savings.
Common industries we see qualify for these types of credits include manufacturing, engineering, IT, medical device, biotechnology, software development, and more. Reach out to us if you want to know if your business qualifies.
2. Alternative Motor Vehicle Credit
If your business has purchased vehicles with fuel cells (e.g., electric cars that use fuel cells with, or instead of, a battery), you could qualify for this tax credit. Many of these credits have been reduced since their initial rollout, with phase-out rules based upon the vehicle’s model and year. So even if your business has purchased alternative fuel vehicles, automatic eligibility for this credit is not guaranteed. Keep in mind, there are a many other benefits to driving clean in CA.
3. Employer-Provided Child Care Facilities and Services
Did your company acquire, construct, rehabilitate, or expand property that is used as part of a qualified childcare facility for your employees? Or maybe you chose to begin a scholarship program or provide employees with higher levels of childcare training some kind of compensation. If any of these circumstances sound like something your business was part of this year, be sure to check out the Form 8882 or ask your tax advisor about the rules for claiming this credit.
Like tax credits, there are various tax deductions available for small and midsize businesses to claim. The key is to research which ones your company is eligible for to ensure you take full advantage of them.
Tax deductions help to lower your taxable income and then can reduce your taxable liability. These activities can be anything from purchasing new assets or having various benefits to offer employees. The amount of the tax deduction will be taken from your income, therefore lowering your taxable income, and in turn, lowering your tax bill.
Tax deductions your business could be able to take advantage of:
Employee benefit programs and retirement contributions
Setting up your employees with retirement accounts is a great way to maximize tax savings for your company. Other qualifying employee benefits include education assistance and dependent care assistance programs.
Make charitable contributions
Any individual or company can make a charitable contribution, but there may be limitations on these deductions under the Tax Cuts and Jobs Act (TCJA). Your business can still deduct cash contributions and gifts, but can no longer deduct the time spent volunteering.
Hire contract (or fractional) employees
If your company hires contract labor (1099 employees), this cost could be deductible for your business.
Not only can contract, or fractional employees, reduce your tax liability, it can also reduce overhead costs for things like payroll, benefits, training, and other additional employee expenses. Hiring fractional employees also offers your company flexibility and greater cost control during slow months or ramping up staff during times of growth.
The cost of business-related supplies such as new equipment, software, and technologies, or furniture for the office, are deductible expenses that can reduce your company’s tax liability.
Business interest expenses
If your business makes a profit, there are expenses you may be able to write off. For an expense to qualify as a deductible, your business expenses must be ordinary and necessary, as defined by the IRS. Meaning, if the expense applies directly to running your business, it may be ordinary and necessary. In any case, it’s best to save your receipts for every expense you deduct on your taxes.
As a business owner, it benefits you to see what you can do to reduce your potential tax liability now instead of waiting until the end of the year when it may be too late to do anything. For instance, how much money will your company bring in at the beginning of the year? Forecasting can help your company develop a tentative plan to maximize your expenses, which can be adjusted as the year progresses.
Your taxes can have a severe financial impact on your business – but with some proactive planning – they shouldn’t. Contact us today to find out how our services can help your team reduce your tax liability for your business.
It’s been over 7,000 miles since your last oil change, so you drive to the mechanic for a service. You’re a few pages through a magazine when the mechanic informs you that your car is on its last legs unless you permit them to fix one specific part.
The good news: they can replace the part for you today. The bad news? It’s going to cost $2,000. While the last thing you want is for your car to fall apart, you can’t help but wonder: are they manipulating the situation to their monetary advantage?
For the average person, knowledge of auto mechanics doesn’t exceed our gas tank, so we make the assumption and leap of faith that the mechanic has our best interests at heart. Without expertise in a given industry, we lack the competency to ask the right questions to ensure we get the best service and keep us from being deceived.
Your tax advisor shouldn’t be an exception.
Whether you have been working with the same tax advisor for years or if this is your first year with a new CPA firm, there are a few key things to expect from your tax accountant to ensure your company is getting the best service.
Your CPA is good if they do this
Working with a CPA who is proactive will prevent problems way before they happen. Most clients assume their tax advisor will not only be proactive but is comprehensive in their knowledge of the client’s business. Unfortunately, it’s more common for the tax accountant to wait until the end of the year to get involved and before asking for all your information and processing it.
So how do you know if you’re working with a proactive tax firm? One sign is they maintain contact with clients quarterly to inquire about the health of the business. With more frequent contact, proactive advisors can make adjustments to payments to ensure accuracy throughout the year, rather than surprising clients with a large and unexpected tax bill at year-end.
What makes a tax firm a good fit for your business? It is helpful if the CPA working with your company has had experience working with other clients within the same industry since they have most likely learned from working with those clients. For instance, if a similar client qualified for something like the domestic production deduction, the CPA will be more apt to see if their other clients qualify as well.
Essential qualities to look for in a CPA firm
It’s a good idea to start by identifying the qualities of the CPA firm you are working with or are planning to work with in the future. Here are a few things to be on the lookout for:
The integrity of the firm
The integrity of a CPA firm is critical. It doesn’t matter whether the firm is large or small; what matters is the individual working on your account. You may choose a well-known firm with an excellent reputation, but if the accountant working on your stuff isn’t attentive, or overloaded with clients, you’re more likely to endure poor service.
The sophistication of the firm
Some firms specialize in certain things. If your business is involved in a particular industry, work with a CPA with that specific knowledge and who has clients in the same field. It’s essential to find a CPA firm that fits the level of what your business is doing.
The competency of the firm
The time may come when a client outgrows the skill set of their CPA firm and are unaware of it. It’s important to work with a firm that can handle your growth and the complexities that come with it, as well as one that can provide the level of service you need.
Is it time to find a new firm?
How do you know if a CPA firm is delivering exceptional service or if it’s time to move on? Here are three red flags to consider:
If your CPA doesn’t get back to you within an appropriate response time (most would agree within 24 hours), responds abruptly, or is just not helpful, these are all signs of a bad relationship.
Poor working relationship
A CPA who only corresponds via email, despite you asking to speak with them over the phone, is another bad sign. Whether the CPA is is overworked, too busy, or has too many clients, they are not acting in the client’s best interest and will not serve their clients well.
You will inevitably have questions for your CPA firm. Those questions may revolve around everything from the paperwork that needs to complete to deductions for your business. If your tax CPA is avoiding or unwilling to answer your questions, or answers your questions in a way that you don’t understand, this could mean the CPA is getting away with doing as little or as much as they want without you knowing.
Even if your tax CPA is proactive and is well-versed in your industry, it may be beneficial for your company to partner with a business advisor. A good business advisor has the expertise to advise clients based on their strategic partnerships, ensuring that your tax accountant is working in your best interest and avoiding any bad advice that may lead you down a costly path.
If you’re overwhelmed or unsure where to start, contact us today. Signature Analytics has a history of vetting and partnering with several CPA firms in a variety of industries. In doing so, we can help your tax CPA focus on getting more done by adding more value this season.
Have you ever wondered how to create a business budget? An annual budget is an essential financial plan for a company’s expenditure for the coming fiscal year. Company owners can use this plan not only to calculate their yearly budget, but also to determine when to file tax forms, get audited, and close the books. Creating a business budget involves balancing your company’s revenue with its expenses using past trends and realistic revenue expectations so that you can predict your needs for the next fiscal year.
Why Does a Business Need an Annual Budget?
A company needs to know how to make a business budget for many reasons. Most importantly, it acts as a roadmap to where your business is going in the next year. Once you establish how much money you have, you can determine how much money you can spend and how much cash you need to meet the goals of your business. Curious how to prepare a budget for a company? This process is vital for several reasons:
It sharpens your understanding of company goals
It allows you to portray the real picture of what is happening in your company
It provides effective ways of dealing with money issues
It fills the need for required information
It facilitates discussion of the finances
It enables you to avoid surprises and gives you full control
This is How to Prepare a Business Budget
Before you begin your forecast for revenue and expenditure, you will need to gather income and expense data from previous fiscal periods. Collecting this information will help you estimate the future budgeting process based on past trends. For example, if you are creating a quarterly budget, then look back at your previous two or three quarterly financial statements. This way, you can create a custom budget based on your desired timeframe. Once you have the trend data, you can use it to create a baseline projection for future revenue and expenditure. For example, if your revenue has increased at an average of 25 percent each quarter, for the past six quarters, increase your baseline projection for the next quarter by 25 percent.
What Are the Elements of an Annual Budget?
For your budget to be adequate, you should break down income and anticipated expenses either by month or by quarter. Which one you choose will depend on the size of your company. The budget should incorporate separate accounts for each of your business’ departments. These departmental mini-budgets should also be broken down by month or quarter. There are many factors that you need to consider when putting together your company’s yearly budget. These components are essential if you want to create an accurate and up-to-date annual budget and maintain control over finances. The budget needs to include:
Projected expenses: the amount of money which you expect to spend during the fiscal year. Projected expenses can be broken down into categories such as salaries, office expenses, etc. There are several steps to make a correct estimate of your projected expenses. The first step is to make a list of your company’s necessities for the fiscal year. You can look back at trends from past years to help you stay accurate. Next, make a list of expenses you will require to conduct typical business activities. It would help if you also listed any of your company’s fiscal obligations. Finally, list the items you would like to purchase for your company but may not be able to afford during the upcoming year. Add up all these expenses to provide a guideline for your budget.
Projected income: the amount of money you expect your company to make during the coming fiscal year. Projected income includes revenue and any income which may be coming from grants, contracts, funding sources, memberships, and sales. There are several steps you will need to take to reach your projected income. The first step is to estimate the amount you expect to accrue from sales revenue. Next, determine the amount you expect from fees that you charge for services. Finally, estimate the figures you expect from fundraising, investments, and memberships. Adding up these figures will give you your projected income for the year.
Interaction of expenses and income: This aspect of the annual budget entails keeping track of the money that was given for a specific activity, item, or position by a funder. It is important to build in any restrictions that might come with the money so that nothing comes as a surprise later.
Adjustments to reflect reality: You must remember to factor in funds for emergencies and unexpected necessary purchases. Also, don’t forget that your annual budget will begin as an estimate, so you will need to adjust it throughout the year to make it more accurate. To do so, layout your figures in a useful format so you can easily compare the total expenses with the total income. Stick to your expenditure budget as much as possible because a budget surplus may not show up until the end of the fiscal year.
This is What Should Non-profit Organizations Should Know
Typically, non-profit organizations are required to undergo an annual audit. The audit must be conducted by a Certified Public Accountant (CPA) that will examine your organization’s financial records to ensure that they are accurate. The CPA will also work with you to solve any problems or correct any mistakes. Providing that the records are in good order, and there is nothing illegal found, the CPA will prepare a financial statement for the organization based on the documents examined. The statement certifies that the non-profit’s accounts are in order and that professional accounting practices (or as we recommend, GAAP) have been followed.
This is How You Trim Your Company Budget
In certain circumstances, you may wish to cut your company’s budget. If so, it’s crucial that you do it in an organized way. Here are some considerations to help you decide on what you can and can’t cut:
Make sure you don’t cut services or items that are necessary for running your business.
Are you able to reduce the number of physical items you need to run a department?
Do you need to consider making staff cutbacks? If this is the case, could you reduce staff hours, ask members of staff to increase their share of their fringe benefits, or is it necessary to lay off some members of the staff?
Do Not Disregard an Annual Budget
Annual budgets are essential for evaluating your company’s performance over the course of a fiscal year. Because you will be comparing and raking revenues and expenditure and comparing these aspects to what was budgeted, you can make sure that your company is sticking to its original plans. Budgeting also presents an excellent opportunity for you to identify issues and opportunities. For example, if sales in the first quarter turn out to be lower than projected, you will be able to see where you can cut expenses late in the financial year to remain profitable. Equally, if you introduce a new product that turns out to be more valuable than you anticipated, you will be able to see exactly where you have additional revenue, and you can revise your budget and perhaps use the extra money to increase production.
Looking for some small business budget templates to help get started? Check out the link or contact us. It’s clear to see why annual budgeting is important for your business. You can make sure that you are utilizing your entire annual budget optimally by employing the best budget management practices. This is the only way your company will truly grow and continue to be successful.
Crafting an annual budget is one of the most important financial aspects of a business, but often gets overlooked.
Business budget planning is an essential task that is frequently neglected at small and mid-size companies. So why is it so important? Well, mostly because it is a process that prepares your company to answer critical questions about what the next 12 months will look like:
What are you projecting sales to be next year?
Are you expecting margins to improve next year?
Do you plan to hire additional employees?
Will you have any significant capital expenditures soon?
These questions (and many others) are typical of investors, financial institutions, potential strategic partners, and financial buyers. Every business, regardless of size, should have the answers to these questions to be able to plan the annual operating budget accordingly.
Having a chief financial officer, or CFO, as part of your company’s C-Suite executive team can be an asset in this process.
A CFO will have access to and be up to date on the most recent financial data pertaining to the company. These resources can help the company craft its budget, as well as short and long-term financial goals. Strategic budgeting is a skill that any good CFO will have in their arsenal. It’s just a matter of working as a team to bring all the relevant information together to plan for the future.
If you are overwhelmed by company budgeting planning, don’t have a CFO, or don’t know where to begin, below are some tips to help you get started:
1. Consult All Departments
The annual budgeting process should not be completed behind closed doors by one member of the accounting or finance team. Instead, all the departments within the company should be part of the conversation and provide feedback, insights, and expectations for the following fiscal year.
Who should contribute to the conversation? Be sure to loop in:
The sales team: they can assist with realistic revenue assessments
The manufacturing or service team: they can advise on costs of delivery and any large purchases required to update machinery
The research and development team: they can discuss expected expenses as well as the timing on any new products anticipated
Any other departments who can add value to the conversation
It is encouraged to incorporate feedback from each department as the results are much more likely to be accurate. Therefore, project completions are possible for the upcoming fiscal year. Too often, companies that do complete the annual budget planning process estimate an overall percentage increase over the prior year’s actual income – this is something that should be avoided.
2. Estimate Revenues
Expected sales have a significant influence on costs, including employee headcount, but it can be very challenging to make projections accurately. Here are some ways to come up with the best estimate:
Consider the recent monthly growth rate experienced by the company and decide if it can be continued.
Review industry guides and other expert publications that focus on your industry.
Review financial information from a number of your competitors, if available.
Communicate with your current customers to better understand their expected needs of your product or service.
Discuss the expected sales with your sales department and set expectations to help determine compensation for this team.
3. Determine Expenses
Once the expected revenue figures are estimated, the focus can shift towards expenses. Here are some considerations:
Some costs relate directly to revenue, whether they be inventory or employee services. Typically, the gross margin of a business does not fluctuate substantially unless new products are developed, inventory prices change, or inefficiencies are identified within the manufacturing process. Use this time to challenge your employees to identify cost savings related to the delivery of products or services.
Other expenses are fixed costs such as rent, insurance, equipment leases, and certain other services purchased. These expenses may be easier to estimate; however, you should consider reviewing the policies in place, especially around insurance. Use this time to determine if better insurance rates are available or if different coverages would be more advantageous.
Employee compensation should always be established to be in line with revenues and related growth in the coming year. Many companies believe that all employees require annual raises, but if the results show a contraction in the business, then it may not be reasonable. Consider tying aspects of compensation to the growth of the company. With today’s inflationary trends, make sure you include cost of living wage increases for your employees in your budget and projections as well.
Along with compensation, estimating employee headcount is a critical aspect of the budgeting process. It is important to identify when you will need to hire, how long that hiring process takes, and what experience level would optimize the operations.
4. Identify Capital Expenditures
Often not considered in the budgeting process are those large or expensive purchases which are vital to the continued success of the business. These may include new computers, systems, machinery, vehicles, furniture, etc. It is essential to keep in mind that each new employee hired will likely require a certain amount of capital expenditure.
Investments in equipment or processes that are directly related to your product or service should also be considered. Will you need to purchase any new materials next year? Is there old equipment that needs to be updated? Avoiding investment in equipment can impact your output, quality, or delivery timing, which can directly impact your revenues.
5. Calculate Cash Flow
While putting together a projected income statement can feel great, it is just as important to calculate the expected cash flow of the business.
Your company may pay bills faster than customers pay theirs. You may need to purchase inventory well in advance of sales if acquisition time is significant. In cases such as these, a cash flow statement should be created using the income statement as well as AR/AP turnover rates and other metrics from the balance sheet.
While it may seem advantageous to show investors that the company will significantly grow, it’s a possibility that results may disappoint. Even worse, business decisions may have been made using such projections (aka best guess scenarios). When in doubt, it is a good idea to be more conservative and leave some room in the projections in case of emergency, unforeseeable large expenses, or a drop in revenue and sales.
7. Start Early
Businesses should begin the annual budgeting process three to four months before the start of their fiscal year to allow sufficient time to craft a detailed estimate before the year ends. However, the annual business budget should be monitored and updated on an ongoing basis. For this reason, it’s never too late to get started.
8. Monitor, Evaluate & Reforecast
Once you complete the budgeting process, the biggest mistake you could make is to file it away only to pull it out again at the end of the following year.
A budget should be monitored monthly, or sometimes weekly for smaller companies. Budgets should be edited if circumstances change, like bringing in more fruitful accounts or losing critical customers.
If you have a CFO on your team, they can help facilitate a strategic forecasting process that extends beyond the annual budget and encompasses more of a three-year plan. This can help push your company to think about future business decisions and goals.
Furthermore, budgets should always be compared to actual results to understand why there are differences. Doing this will help monitor spending money throughout the year and help management make important decisions in relation to the business. Put these tips into action and learn how to prepare an annual budget with our in-depth guide.
We Can Help
Signature Analytics will help guide your company through the annual budgeting process. We will work with your management team to create a budget for your business and monitor that budget throughout the year.
This would include analyzing the budgeted versus actual results quarterly and helping forecast accordingly. We can also perform industry and economy reviews to assist with the forecasting process and provide benchmarking data.
Chances are, as a business owner or decision-maker, you are always running from point A to point B. You have a call with a prospect at 7:15, need to drop the kids at school, and somehow get in the office for a meeting at 8:00, and when you get there your secretary needs a signature on a check, your VP is asking about the phone call, and you still haven’t had a cup of coffee. At this moment, the last thing on your mind is how to do a budget for your business. You are not alone. So many companies fail to create a good budgeting plan to help them head down a path full steam ahead.
However, a budget is essentially a roadmap of the business, and without one, that path you are headed down could have a dead end.
While most business executives understand the value of having a formal budget, it’s one of those tools that often gets overlooked or de-prioritized when you’re busy running the day-to-day. Without it, the business you are making so many sacrifices for may very well fail.
We don’t want to see that happen, so we have crafted the top factors that decision-makers often overlook when they create their business budgets. That way, despite the chaos of your daily schedule, you don’t have to remember these often missed budget categories.
1. Goals Don’t Align With Strategic Priorities
Let’s start by simplifying the difference between a goal and a strategy. A goal is what a company wants to achieve over a specific period of time. Goals are typically outlined in a business plan and could pertain to the entire business, specific departments, or certain employees or customers. A strategy is a long-term plan of action designed to achieve a goal. See the difference? A list of goals is not a strategy; they are merely a light along a strategic path, indicating your business is headed in the right direction.
One of the biggest mistakes you can make when building your budget is to list goals that don’t align or support the business’ strategic priorities.
Often we see many companies confusing strategies with goals. It is crucial to remember that goals are what you want your company to achieve, like increasing growth and profitability, expanding into new markets, and more. When setting goals, remember to be specific and realistic. Then, do not fail to prioritize goals and be sure to create strategies that help accomplish them.
Identify critical priorities (tasks that need to be accomplished immediately), followed by important priorities, and so on. Then determine the goals that support these strategies and put them into action.
2. Cash Flow Analysis Is Missing From The Budget
How do you know you are fit to run a marathon? Likely, you have trained, bought the right pair of shoes, and done a health check-up with your doctor. In this scenario, a cash flow analysis is the clean bill of health your doctor provides. It is a way to check the financial health of your business.
Often, a good budget is the first step in your company’s financial forecasting. So, if you lack standard, consistent processes to track the cash flowing in and out of the company, your business is setting itself up to fail.
Monthly revenue forecasting can help you make important decisions about your business. Since fixed expenses are generally unchanging and recurring month-to-month, these should be forecasted. Similar to your fixed expenses, variable expenses are the costs you pay every month but can change over time.
Proactive cash flow management ensures that your forecasts of when cash should be paid and received, giving you a better insight into whether your company is at risk of running out of money.
Fast-growing companies are often cash-strapped, but there are many ways to reduce the amount of money flowing out of your business. One of the fastest ways to do this is by cutting costs.
Cutting costs can have a significant effect on your budget. For instance, one of the most essential expenses for companies is payroll. Are there any roles within your organization that can be performed part-time? Hiring part-time, or even fractional employees, will save the company money in the long-run. Not having to provide other expenses such as employee benefits and paid holidays can really pay off, literally!
If your company leases or owns its equipment, selling or returning unused equipment will also help cut costs. Another idea is to consider what employee perks your company offers, like company cars, gas cards, gym memberships, or other wellness programs. Consider asking employees what they appreciate most and whatever doesn’t make the list can get cut from your budget.
Getting lean gives you greater flexibility and wiggle room in the instance that any unexpected or unforeseen costs arise without decimating your budget.
4. You Are Focused On The Wrong KPIs
KPIs, key performance indicators, are the measurable data that demonstrates the performance of various processes. So it’s important to understand the difference between vanity metrics (which give you a false sense of success) and the metrics that show the true health of your business. These metrics will often include active users, revenues, and profits.
Businesses must track and measure industry-specific KPIs. For example, professional service businesses should be monitoring employee utilization, new monthly leads/prospects, cost per lead, cost per conversion, and others. A manufacturing company may focus on labor as a percentage of cost, maintenance cost per unit, or on-time orders and shipping.
Having a budget that includes both long and short-term objectives allows your business to create a focus for the future direction of the company. Without it, you could be leading your company down an unclear path that could ultimately lead to the demise of the business.
Remember, Signature Analytics is here to help guide you through the budgeting plan, which includes setting and tracking the right metrics and KPIs. If you need assistance creating a strategic budget for your business, contact us today.
A budget isn’t just a piece of paper; it’s a tool for your business.
The majority of businesses out there don’t have a formal, written budget or plan. Maybe the business owner has put one together and then put it away in a drawer and hasn’t revisited it since. Perhaps the business doesn’t have anyone who can put one together. Or maybe the owner just doesn’t know where to start.
As the owner of your business, having a budget is critical because it allows you to define your goals and make the strategic decisions that are imperative to the survival of your business. By using your budget as a tool, you can not only track performance but identify risks and opportunities.
Budgets that fail are often the ones that were unrealistic. Just because you had a great Q1 doesn’t mean that Q2 will be as strong. Past revenue does not guarantee future revenue.
What steps should you take to ensure you create a strategic budget that sticks versus one that fails?
Your department heads should have a general grasp on what they are want to accomplish within their department including plans on how to get there, areas within the department where they may be able to cut costs, or other valuable input that can help make for more precise budget planning.
There are usually at least 2-4 people from your company who you’re going to need significant input from when creating your budget. When you begin your budget planning, be sure you are soliciting input from all of your critical departments.
DETERMINE YOUR GOALS
What are the goals of your business?
Whether you are looking to launch a new product, increase your market share, reduce expenses, increase productivity, or have better cash flow management, your budget acts as a path to accomplishing these goals.
Well-defined goals (that can be measured) can improve every aspect of your business. Have a process in place to help you measure these goals and hold your department heads accountable for hitting those goals.
DETERMINE YOUR COST DRIVERS
What are the factors in your business that incur costs?
Determining your cost drivers will help you make more accurate expense projections. Cost drivers are dependent on the type of business it is. For example, if you own a manufacturing business where machines need to be set up, your cost drivers could include setup time as well as direct labor hours. Identifying those that impact your business will improve your budget.
MONITOR AND ANALYZE
Your budget can work as an accountability tool for both you and your department heads and can be monitored with performance reports. Benchmarking helps improve performance, allowing you to analyze past performance against current performance or even assess how your business is performing against industry averages. This ongoing practice helps to determine whether the business is falling behind your plan (and help you get back on track), or allow you to see what you are doing right so you can replicate those activities and continue to grow.
The goal is really to understand how to control the business, which can be extremely difficult. Going through this disciplined approach of planning your budget and sticking to it will help you get there. Signature Analytics can help guide your company through the budgeting process. If you want assistance creating a strategic budget for your business, contact us today.
What would your business like to achieve this year?
We’re a month into the new year and you’re still finding excuses to put off that budget. This month’s culprit? The Big Game. Or maybe it was school vacation or holiday break. Either way, you see the pattern.
You would be hellbent on finding a team that shows up to the Big Game without a strategy and a plan; why should ensuring your business is set-up for a successful year be any different? So before the keg is tapped and the coin tossed, here are a few budget planning tips to get you started:
1. Create a realistic budget Your company may have ended 2017 with an unprecedented Q4, which makes this year’s goal a clear one: continue to trend that way for 2018. One of the biggest mistakes you can make is to create this year’s budget solely using information from one strong quarter. Be sure to investigate any sudden increases or decreases throughout the prior year.
Building a realistic budget requires determining revenue earned from all streams including fixed and variable costs and any one-time payments that may be coming up. Avoid setting an unrealistic budget by looking for industry trends. Also, look at historical financials and average increases, then use those findings to implement a budget that aligns with your business objectives.
2. Calculate expenses What is the minimum revenue your company must generate to cover your expenses? Before creating a budget, take a look at your weekly, monthly, or yearly expenses associated with running your business including common overhead costs (e.g. rent, office supplies, insurance, and HR). What expenses can your company stand to cut from the budget? This could include negotiating with vendors for lower prices or paying invoices early especially if the vendor offers discounts to reliable customers.
Take a look back at each month and see where your business is coming in at, then make adjustments as needed to find the budgeting technique that fits your business.
3. Take a look at your cash flow statement Is it costing more to run your business then what is currently coming in? Do you know how much actual cash your company has generated? Since a cash flow statement is the lifeblood of your business, it’s essential to know what your cash inflows (receipts) and outflows (payments or disbursements) are when creating a budget. If no one is tracking the cash flowing in and out of the company, your business is setting itself up for failure down the line.
4. Have long-term goals in mind Are you looking at the big picture? Whether you’re budgeting to expand, looking to double revenue by the end of the fiscal year, or planning to sell the company, focusing on long-term goals will work as a roadmap to ensure your business continues down the right track. After determining long-term goals for the company, ensure your team understands those goals and then identify what first steps are needed to support and put those goals into action.
It seems like Q4 flew by! Isn’t it like that every year, though? Now the glitter on the floor from New Year’s has been cleaned up, and the fancy champagne glasses are away. Those items you swore you’d get to before the year was out are still left unchecked on your to-do list, and your business budget is no exception.
You thought you had plenty of time to build, examine, and implement a solid plan of business resolutions to kick-off the new year, but the celebrations came and went, and the work didn’t get done.
You now have two choices. Say “oh well” and hope Q4 this year is more efficient. Or, kick it into high gear, inspire your team, focus them, and roll up your sleeves to get to work. (If you’re wondering, we are urging scenario two in this case.)
Creating a plan to organize your business objectives is essential to the growth of your company. While it may take a few days or even weeks to tackle, you shouldn’t wait to put those goals into action.
Below are seven goals to get you started just in time for February:
1. First Set Your Budget, Then Lower It
Take a look at the budget you created in the last year with your team. Now is the time to review it and see if the budget in place was realistic and in aligns with your business objectives. Building and setting a budget requires determining revenue earned from all streams, fixed costs, variable costs, and any one-time payments that may be coming up.
Once a budget is set, look for ways to cut costs or expenses. This process can include paying invoices early (many vendors will offer discounts to reliable clients/customers) or negotiating lower prices with vendors. Lowering payroll will also cut expenses. Try hiring interns or outsourcing in areas where you may not currently need seasoned or full-time professionals. Find a budgeting technique that best fits your business.
2. Better Manage Your Cash Flow And Financial Records
“Making more money will not solve your problems if cash flow management is your problem.” -Robert Kiyosaki
The last thought that should ever cross your mind is: “what happened to my money?” Does your business have a cash flow forecast created? Are you tracking your performance against the forecast?
Since cash flow is the lifeblood of the company, monitoring it is critical. Whether for future endeavors and purchases or if you know you will need to start looking for financing options soon, you want to be able to see what cash available. If you aren’t considering different scenarios for the forecast, it’s time to start before it’s too late.
3. Plan And Prepare For The Future
Can you predict the future? Unless you have psychic powers, you will likely need to rely on other means to understand how to plan for the future. While predictive analytics can be a relatively inaccurate source of information, financial metrics tracking past performance (and are relative to your business) can be used to prepare for future expenses. Past expenses can also be used to create a forecast/budget. A budget could also include any new costs the business is expecting to take on or account for increases at any expense.
While some debt is suitable for a business, more often than not, it can cripple, and even bankrupt, a company. Businesses accrue debt in countless ways. It could be due to expanding too quickly, financing new projects too early, or even something as simple as being unaware of company spending habits.
Creating a plan is an excellent way to reduce, and ultimately, eliminate debt. A debt-reduction plan could include actions such as cutting expenses, speeding up collections, or contacting creditors to consolidate or renegotiate the debt. A business should also pay off high-interest debt first.
No matter what’s on the plan, the end goal is universal- creating strategies that can be implemented long term and eradicate bad debt.
5. Do Your Taxes Throughout The Year
Making quarterly tax payments isn’t for every business, but could be beneficial, especially if you’re focused on your statement of cash flows. Making quarterly tax payments spreads out cash payments instead of taking what feels like a big hit all at once. Contact your tax CPA to find out whether paying quarterly fees will be beneficial to your business. Don’t have a good CPA, contact us for a referral.
6. Save For A Rainy Day
“All days are not the same. Save for a rainy day. When you don’t work, savings will work for you.” -M.K. Soni
The American market has historically turned volatile on a dime, every company, regardless of size or revenue, should have access to a cash supply in the event of an emergency. Cash flow forecasting and management can also help prepare your business for a rainy day. Planning and monitoring cash inflow and outflow will help you see your expenses and what you can cut, yet still operate, while slowing down cash burn.
With a defined roadmap in place, the final step is consistency. Without consistency, there is more room for ambiguity, which can create a chain reaction of inefficiencies throughout the business. These inefficiencies may affect operations and employees or spread to clients and customers.
Establishing and maintaining consistent policies can improve the organization with the company, employee turnover, and customer retention. Strategies like this can also help to reduce churn and aid in the growth and expansion of your business.
It is easy to go down a rabbit hole, and before you know it, the end of the year is here, and the work we wanted to get done got put on the backburner. We encourage you to take control of your finances as quickly as you can so you can be more organized and effective in the new year.
Signature Analytics can work with your team to create a budget for your business and monitor that budget throughout the year. If you need assistance building or improving, a plan to organize your finances and grow your business, contact us today for a free consultation.
As we enter the fourth quarter, the successful entrepreneurs and business owners are starting to work on their strategic budgeting plans and goals. Here is your year-end checklist:
Budgeting and Forecasting
Did you create a 2016 budget and subsequent forecasts and are you comparing the budgets and forecasts to your 9-month actuals?
Is this occurring on a routine, timely basis? Tracking actual performance against a budget will assist business owners in understanding why the business is either exceeding or not meeting the expectations set in place, thus allowing to make real time decisions to improve business performance.
Cash Flow Management
Have you established a plan to meet and exceed cash flow expectations? This can be done through setting revenue and profitability expectations, debt and financing relationships, establishing terms with customers and vendors, etc.
Proactive Tax Planning
Do you have a proactive tax plan? When are you meeting with your Tax Advisor to review / update 2016 tax strategy? This meeting should be happening before Thanksgiving.
Thousands can be saved in tax liabilities or current cash flows by developing an appropriate tax planning strategy PRIOR to year-end.
Employee Compensation Plans
Are your employee compensation plans aligned with the overall goals of the company? Are there ways to incentivize employees to improve efficiencies to help achieve business goals for 2017?
Profit-sharing and educating key employees to understand the importance of maintaining or growing gross margins are a couple of examples. Do you know the difference between gross margin and operating margin?
Open Enrollment through the Health Insurance Marketplace begins on November 1.
Are you able to renew your health care plan early and save? The Affordable Care Act continues to change and drive up health benefits and proactively talking to your broker of record is step one.
We Can Help
Signature Analytics is a resource that can assist. Signature Analytics provides ongoing fractional finance and accounting support which includes: financial analysis, outsourced CFO services, and business advisory services that help grow and scale businesses. Contact us today to schedule a free consultation.