Here's the 9th newsletter in the Business Management series that will take you through aspects of managing (business, financial, jobs, labor), giving you insights and techniques to help you build a better business.

The following content is extracted from Mike Holt's Business Management Skills Workbook.

Establish your firm’s financial goals as realistically as you can, taking into account:

• General business conditions
• Competition
• Size of the marketing area
• Financial capitalization
• Number and skills of your employees
• Your own management and leadership skills

Determine your objectives and then prepare a financial budget. This becomes your firm’s financial statement for a fixed period of time (usually one year). It’s based on estimates of expenditures for each business function, and includes direct costs and overhead, plus an estimate of anticipated sales volume necessary to cover the expenditures and leave the desired net profit.

New businesses will require the use of estimates, which may later prove to be little more than wishful guesses. Established businesses will have a history to draw upon from which accurate projections of income and expenses can be developed. The following questions are well worth the time it will take to correctly answer them:

• How fast do you want to grow?
• Are there any problems to be expected regarding the availability of a suitable labor supply?
• Sources of financial credit?
• Availability of materials?

As you receive your quarterly financial statements from your accountant, use them as a guideline to see how closely your progress is adhering to budget, and to make any necessary changes in planning, policy or objectives. Income statements are results; budgets are scorecards comparing established goals to actual performance. Comparing what you thought you could accomplish with what you actually accomplished can be a very humbling and motivating task.

Your supply of cash influences every aspect of the financial health of your company. Know what your cash balance is at all times. Don’t overlook the importance of billing and collection, which will help you maintain an adequate flow of cash. When more cash is available, budgets can be more liberal. Some owners read the record of billings, sales, deposits and checks written every day before they do anything else. These amounts are vital business condition indicators and tell them what areas require their attention each day. Business today must be run by the numbers, not by gut-level feelings. Know your numbers, your business health numbers, cash, accounts receivable, accounts payable, backlog, etc.

Keep excess operating funds working at all times by placing them in savings accounts or other investments where they will earn a return, until you experience a delay in getting full payment due to billing approval delays, retainage, or slow collection. Where projects are to be delayed for long periods, review your contract and begin to develop a change order so that you can get paid for additional costs arising from material inflation.

With proper forecasting and budgeting techniques, you’ll be able to figure out what’s needed to cover debt service cost. Once the budget is established, decide if you’re going to do something, or who else is going to do it, how it should get done, and then continue to track income and expenses by percentages. Once you get a job, forecast billings and collections to determine when to anticipate money coming in. It’s difficult to predict cash flow, but with planning and plotting you can estimate or learn to anticipate cash-flow trends. The monitoring of your firm’s current cash condition is vital to continued operations.

Maintain records of billing and deposits, cost per day, etc. Determine your billing cycles and keep records accordingly. The added effort in maintaining these records will pay off by providing you with accurate figures for future bids and compensation for the lean times. You want to know where you are, where you’re going, and when you’ll get there. Look to history and keep good records. They’re good sources of guidance for producing future projections.

We'd love to hear from you about this series, and the ways you're using it. Send us your comments and feedback by clicking on Post a Comment below. Look out for the next part in this series a month from now, and please share with your colleagues.

This content is extracted from Mike Holt's Business Management Skills book. If you have enjoyed this newsletter, you can get the full content here.