The economy remains tough for most industries, so heading into 2011 is uncertain for many business owners when it comes to forecasting and budgeting. Do you expect strong profitability? What else can possibly be cut to reduce expenses? How can you pay the bills? These questions, plus many more, form the foundation of concerns for numerous business owners in these uncertain times.
“A couple of useful financial tools to help calm nerves and gain a handle on finances are preparing an annual budget and projecting cash flow. Cash flow management is the process of planning, budgeting, measuring and controlling the money that flows into and out of your business,” says Jeff Hipshman, partner at HMWC CPAs & Business Advisors in Tustin. “Since high operating costs and low profit margins, coupled with tight credit and a shaky economy, can mean poor cash flow for many companies, a firm grasp of cash flow can be critical to your business success.”
Smart Business spoke with Hipshman about how he helps clients with their annual forecasting and budgeting process.
How should I use our financial statements in budgeting?
The balance sheet provides a picture of your company’s assets and liabilities, measuring a single point in time. This is only a partial picture of the company, since it only tells part of the story. For example, it may indicate significant accounts receivable, but, if payment is running far behind, the company can face a cash flow issue soon.
The income statement indicates the business’s profitability during a certain period, which can be misleading for some business owners, especially under the accrual method of accounting if they don’t fully understand it. Further, the income statement contains many arbitrary noncash allocations, such as pension contributions and depreciation and amortization.
The cash flow statement, however, connects the balance sheet and income statement to provide a more comprehensive view of your finances. For example, when analyzing your company’s liquidity, cash flow information is more telling. A cash flow statement reconciles and records the changes in the other statements and nets out the bookkeeping, showing the amounts and sources of profits and losses for any given period. The cash flow statement also maintains records of your company’s fiscal transactions.
