week number nine in this 10-week journey of ours... and, like most things in life, our trusted leaders have saved the best for last. i mean, surely this group of creative entrepreneurs has been looking forward to "understanding budgets and financials" since registering for the class, right? um, probably not.
i don't intend to speak for everyone in the class, but by nature we creatives are too busy being... well, creative to be bothered with the minutiae of whether something makes FINANCIAL sense. i mean, if the universe is going to provide me with everything i need, what’s the point of worrying about whether or not i can actually afford to do it? ha! hopefully the bank will understand when i come knocking for start-up capital. ;)
not to make light of some sound philosophical perspective, because i truly believe we ARE given everything we need to succeed. but in the world of finance, an existential reliance on positive thought doesn't always produce as profitable results as we're hoping for. lucky for our class, however, we had a number-crunching pro come shed some light on how to use detailed budgets to our benefit.
presenting at this week’s NxLevel class was EKS&H's senior accountant rebecca mcfadden who came to help us see the assets, liabilities and equity of our respective companies through the highly-focused lens of a balance sheet and to present our (theoretical) revenue and expense activities through an equally-specific income statement. ugh.
a balance sheet, mcfadden says, is a cumulative document based on a relatively simple equation: liabilities + equity = assets. a company's assets include cash, accounts receivable, inventory and property/equipment. liabilities may include accounts payable and loans, while equity can take the form of owner contributions or stock options, she says.
an income statement, on the other hand, is a financial document fixed on a certain period of time with its own simple economic equation: revenues - expenses = net income (loss). revenues, obviously, are funds received for performing a service or selling goods, and expenses are the costs associated with running your business. easy, right?
"a budget's purpose is to paint a picture of what the year will look like financially," mcfadden says. "it provides a means to guide a company's activities and measure performance." a comprehensive budget, she says, includes not only the aforementioned balance sheet and income statement, but also a detailed cash flow statement that takes into account all the aspects relating to your other financial documents.
next on the financial agenda, mcfadden says, is managing inventory in order to maintain proper levels of product to support demand while managing cash flow. and, the budget-guru says, when fine-tuning your inventory management needs there are several things to keep in mind that will help you achieve your goals.
1) consider the cost to create your product: is it more cost effective to produce in batches? what are set-up costs? 2) life of the product: when will it expire? will the consumer need a new one? 3) storage needs: will you need much room to store? costs of storage? can you fulfill orders? 4) variety: is there much variety in your products? 5) meeting demand: when will you re-order? is there item turnover?
lastly, all of the topics above relate to a business' cash flow projections. this document sets the expectations of cash flow in and out to manage operating expenses, major purchases and potential financing needs, mcfadden says. managing a company's profitability, in addition to managing its balance sheet will reflect the business' cash flow projections.
mcfadden says preparing cash flow statements (available cash + sales/collections - payments = projected available cash) can be done daily, weekly, monthly or whenever applicable. some things to consider when creating these budget documents include accounts receivable/payable turnover time, borrowing capacity, inventory requirements and equipment/capital needs.
i wonder how outsourcing my accounting needs will affect blue13's so-called budget?