This same predicament holds in business as well as in one’s personal life. CEOs and General Managers constantly calculate how their corporate activities can “fit the budget.” Some common examples of tough financial decisions include hiring future employees, purchasing new machinery for operations or calculating the efficiency of new measures implemented to cut costs. The immediate question is typically, “Can we afford it in the short-term?”
Even when the answer is yes, the best practice in business finance is to look beyond the short-term to at least one year of this decision’s impact. While you may be able to pay a new employee $50,000 for half a year of work, an annualized allotment of $100,000 for the next full year may prove unfeasible due to the seasonality of the business.
The next step is to have the tough conversation about the best way to allocate limited resources.
Whether you have a Fortune 500 company with billions in revenue or a bootstrapped start-up that is pre-revenue, every company should have an out-looking financial plan of at least 2-3 years to best judge how a business decision will affect the company in the future. It is also a useful practice to reevaluate your plans every quarter– at a minimum– to ensure the projection of any material changes. These methods help to ensure that you won’t encounter surprises in future periods.
Plan for the worst and expect the best. One popular analysis that may put you ahead of the game is to model out the effect that minimum wage increases will have on your business. You may be surprised at how even a $0.75 increase per hour can have a substantial change to your future profitability.
A common analysis among start-ups is a cash burn analysis. In this exercise, you will figure out and manage your cash burn so you can know the cash runaway you’ll have left. This analysis is vital better estimating when you may need additional funding from either an external or internal source of capital.
Here at Withum, we use our years of experience for Fortune 500 and emerging companies in Financial Planning and Analysis to come up with best in practice methods for creating and advising on the budgeting process. We can do everything from creating a 2-5 year financial model so your business can project future results, to working with you to define a budget so that it is as comprehensive as possible. We can help you plan future revenue/expenses (i.e., hiring ramps), create sensitivity functionality and implement new technologies to help you in the budget process and leverage it to create more efficiencies.
Whatever your next business venture may be, use these tips to protect yourself from long-term adverse effects. Setting yourself—and your business—up for financial success is a foundational step towards a prosperous enterprise.
Need help with your projections/budgeting or financial analysis? We can help. Reach out to our experts for a free consultation.