Making money is not the sole purpose of your business. It’s about creating something of value about which you are passionate and to which you are committed.
But unless you carefully track and quantify how money is flowing through your business, your vision will never reach its full potential.
If you want your business to be successful, then you must manage it carefully and ensure that it becomes profitable, cash positive, and maintains a healthy position over time.
In order to achieve your vision, you need a plan.
The 2012 State of the Business Owner Report shows that owners who had written plans for revenue growth, and the means to track it, grew their revenue 60% faster than businesses with no written plan in 2011.
The two phases of your financial tracking plan
Creating a plan to track and manage your financial goals consists of two phases:
- Establishing clear financial targets for your business.
- Carefully tracking how your business is performing in relation to those targets.
In order to establish clear financial targets, you need:
- Your Primary Aim (Your Personal Vision)
- Your Strategic Objective (Your Business Vision)
- Your Budget
- Your Cash Plan
In order to track your financial performance, you need:
- Your Income Statement
- Your Cash Flow Statement
- Your Balance Sheet
- Your Budget and Cash Variance Reports
How to establish financial targets
The financial targets you set for your business must be based on what your business needs in order to break even, at the very least. However, you really want to aim for what you want your business to achieve in order for it to fully realize your vision.
It is essential that you have a vision for your life and get to know yourself well enough to understand how much money your business needs to earn in order to provide you with the life you want.
You need to educate yourself on the basics of business finance and work closely with financial experts, advisors, and professionals as much as possible. You don’t need to be the financial expert, but you need to be the financial leader and find experts who can help you pull your business’s financials together.
You want to establish financial targets for your business at least three to five years into the future. Financial targets should be linked to your businesses profitability, cash position, and financial health.
Once clear targets are set, the next step should be to create a budget and cash plan that breaks down your plan to get from where you are now to those targets in incremental periods. For example, to reach your target revenue goal three years from now, you need to reach a certain point after two years; and to reach that two year mark you need to be at a certain point after one year, etc. This allows you to focus on how you’re going to achieve your goals in the first year.
How to track if you’re achieving your targets
After you have targets in place and a budget and cash plan to achieve those targets, you need to carefully track whether your business is on track.
That is the purpose of financial reports, and there are only a few basic financial reports that you need in order to quantify how your business is working.
These include your Income Statement, Cash Flow Statement, Balance Sheet, and your Budget and Cash Plan Variance Reports.
It is not enough to just track sales or net profit, you need to understand and pay attention to every line item to understand more fully the controls you have over these important indicators.
Your Income Statement tracks your revenue, expenses, and your profitability. Many business owners are familiar with their Income Statement, but few actually learn how to use it as a strategic management tool.
Many business owners routinely check their bank accounts to confirm their cash balance, but few actually create a cash plan for their business and understand how to use cash to their advantage
Your Cash Flow Statement tracks the actual flow of money into and out of your business, and increases your awareness of predictable patterns.
Your Balance Sheet gives you a picture of the financial health of your business at any given moment in time. Surprisingly few business owners pay enough attention to their Balance Sheet, even though it is the one statement that can convey critical information such as the equity value of their business and how leveraged the business might be.
Nothing ever works out exactly as planned, but you still need a plan.
You need to know what the difference is between what your business is actually doing and what you planned on.
Budget and Cash Variance Reports simply show your business’s actual performance compared to what you anticipated and projected in your budget. A regular review of your Variance Report helps you fine-tune your projections, predictions, and expectations for the next budget cycle.
Some helpful tips
You should consult with financial experts and professionals who can advise you competently.
Confronting what you don’t know and seeking expert counseling is a sign of a mature business owner.
Good financial management software can help you ease the seeming drudgery of financial report-generation. Automate as much as possible with programs such as QuickBooks.
Seek recommendations from your accountant in order to assure alignment with the system they’re using.
To learn more about how planning and tracking is key to building a thriving business, check out the 2012 State of the Business Owner Report.