Last year didn’t build income. We didn’t make that much money. We were grossing good money but have a lot of debts to pay off. Our bank account is low – a lot lower than I’m used to. I didn’t see this coming. How do I fix this?
Thoughts of the day: Build income or build up cash can be a real challenge. The profits that show up in a profit and loss report get distributed to pay for many things. Build a budget for both the profit and loss report and the balance sheet can help. Get a good handle on costs that are variable and ones that are fixed. This is essential for predicting what will happen in the future. Prioritizing savings and getting debt-free will help the long-term picture.
Build income build real wealth
In order to build up cash on hand, the company needs to make a profit — which means that more money comes into the company than goes out. That means keeping a lid on spending and planning to pay taxes on profits. For every dollar you want to put into savings or use to pay off debts. You need to make about $1.33, to allow for federal, state and local taxes on profits. Said another way, for every $1 of profit, only two-thirds will be available to put toward savings and debt repayment.
There is an annual rhythm to spending that most business owners don’t think about. When planning, spend from year to year and quarter to quarter. Businesses often use up year-end profits to buy things needed in the coming year. Save on taxes. Other businesses focus on building up cash. Especially between January and April to pay taxes on the previous year’s profits. As businesses move back and forth from a spending cycle to a savings cycle. Many industries are much busier in the fourth quarter than the first quarter. That means a steady ramp-up in sales during a year. Followed by a drop in volume the beginning of the next year. If your business is geared up for the fourth quarter and not ready for a drop in volume in the first quarter, profits could drop through the floor.
Hard work alone isn’t enough
Whatever profits the company generates during the year, it pays to be aware of how many thing can drain the coffers: taxes, savings, paying off debts, advance spending to ramp up for growth in the coming year, increased money sitting in accounts receivable as the business grows, vendors who tighten up terms in down markets, increased costs of materials and services as the economy expands and, of course, paying shareholders distributions rewards. What looks like a great year of paper profits can very quickly turn into a negative cash year.
Reports indicate that most small businesses lack a budget. Business owners admit that a budget is an important tool for managing a well-run business. Research shows that having and using a budget is a significant success/failure determinant.
Costs increse in a growth cycle
If the business does have a budget, the focus is usually on building one for the profit and loss statement. Remember to also build budgets for the balance sheet. Set goals for savings and debt repayment. Need for credit lines and payments to shareholders. As well as one for each major project anticipated in the upcoming year.
Budget for the profit and loss statement. Separate out variable expenses. Like those that are likely to go up when sales go up, or drop when sales fall. Use the cost-of-goods-sold category to isolate these costs. Figure out what percent of sales is used up to cover cost of goods sold. Understand how costs are likely to increase in a growth cycle.
It may take a while to build up cash and pay off debts. Don’t give up working toward that objective. Have cash on hand and be able to keep profits in the company. Create a significantly brighter future for you and your business.
Looking for a good book? Try “Managing Cash Flow: An Operational Focus” by Rob Reider and Peter Heyler
