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A Strong Financial Foundation Is the Launchpad for Growth

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Here’s the scenario: business is good, and growing—sales revenue is up as compared to last year, clients are happy and their number is growing. So what’s the problem? For some reason, business is not making a profit. What’s wrong?

This puzzling and frustrating problem is more common than you think. It could be that expenses or debt payments are eating you alive, but there might be a less obvious problem—your financial management leaves something to be desired, so you’re unable to find and fix the money leaks. Let’s take a look at the usual suspects.

Do you invoice clients in a timely fashion, say, within 14 business days after completing a project? Are invoices paid within 30 days of receipt—or is 60 days the more likely payment timetable? Do you keep up with accounting/bookkeeping functions and complete the business financial statements—Income Statement, Cash-flow Statement and Balance Sheet—within 14 business days of the next month? Most of all, do you review the financial statements and analyze the info so that you are aware of the story your business financial data is telling you? Do you act on that information by making adjustments in how you operate—trimming expenses, adjusting prices, invoicing on time, for example? Beyond that, do you have a business budget and do you operate within it?

The moral of this story is that businesses do not always fail because of a product-market mismatch or an aggressive competitor who gobbles up market share. Sometimes a business can be a victim of its own success and grow faster than its financial foundation can support. The weak points are often either cash-flow deficiencies caused by late client payments, which may be a result of slow invoicing, unwieldy debt and expense payments, poor pricing strategy, or inadequate working capital. Fear not, my friend—with a bit of disciple, you can control most of these issues.

Money is the lifeblood of the business and along with sales revenue, you want to focus on building up enough working capital: that is, the amount of money that remains after business liabilities are subtracted from business assets (see your Balance Sheet). Working capital is liquid, meaning it’s available to float you now. You also want to promote good cash-flow, so that you can stay on top of accounts payable and, if applicable, payroll (whether for 1099NEC or W2 employees)—ideally, without dipping into the working capital fund. Your intentions to grow, expand and/or make capital improvements or upgrades to your business depend on the amount of available working capital, which is supported by revenue and cash-flow. If necessary, working capital can be used to pay operating costs while you’re waiting for the accounts receivable to be paid. That said, keep in mind that business growth plans cannot be viable unless adequate working capital is available to put things in motion. In other words, getting your financial house in order, step by step, is integral to facilitating the business growth that you envision. To that end, below are financial management practices that you may find effective.

Accounting–Staying on top of accounting/bookkeeping functions will keep you fully apprised of your company’s financial condition. You know that it’s not possible to effectively plan or manage the company without accurate financial records that provide information that you can review, analyze and use as decision-making guideposts. If your monthly revenue exceeds $2000, you might have the wherewithal to hire a bookkeeper or business accountant to prepare the monthly financial statements and the quarterly and annual tax filings. Personal referral is probably the best talent search method, but social media or NextDoor can also be helpful sources. However, don’t be afraid to do your own bookkeeping! Taking on the financial management of your company, even if only for a year or two, will give you numerous valuable insights that you would otherwise never obtain. You might investigate Quicken Simplifi to start the process.

  • Ensure that all transactions are recorded—every business lunch, every office equipment expense, each fee paid to attend a business networking meeting or professional development session, all client invoices. Document every spend, every month.
  • Ensure that transactions are correctly categorized.
  • Can every payment you receive be cross-referenced to an entry in the books?
  • Are monthly Profit & Loss and Cash-flow Statements and the Balance Sheet completed and closed out within 14 business days of the next month?

Accounts Receivable–A joint study conducted by SCORE, the Small Business Association mentoring program and the financial services company U.S. Bank revealed that as many as 82 percent of startups and small businesses fail due to poor cash-flow management. Sending an invoice is a wonderful feeling, but you hold your breath until payment is received. You need to get paid within 30 days in order to control and predict cash-flow. Business plans cannot be made until you can confirm the amount of available funds. Help yourself by invoicing in a timely fashion and also by discussing the invoicing schedule with every client and following it.

  • Is anticipated revenue (i.e., accounts receivable) linked to agreed-upon project milestone payments or, if you sell a product or service via subscription, are subscription renewals linked to accounts receivable? Are invoices promptly, perhaps automatically, sent according to contracted agreements?
  • Is the status of receivables updated once they are collected? Is there timely follow-up on unpaid invoices (e.g., reminders are sent on day 45)? Automated reminders will be a helpful method to implement a formal accounts receivable follow-up process.
  • If you have the type of business where extending credit to customers is the norm, have you developed a standard set of credit terms and customer credit limits?

Forecasting and budgeting–Planning, budgeting and forecasting are central to financing the company’s operations and short- and long-term goals. When forecasting and budgeting, you will be greatly assisted by software such as QuickBooks, Quicken, or other financial software solutions.

Forecasting is the process of making informed predictions about future business outcomes. The process can involve projections for specific business metrics, such as sales growth, or for industry changes, or recommending how you will be best positioned to navigate the economic landscape in which your company operates. Forecasting uses your company’s historical data and analyzes current market conditions to make predictions as to how much revenue your organization can expect to earn over the next few months or years. Companies use forecasting to support the development of business strategies. Historical company data is analyzed so that patterns can be recognized and used to predict future outcomes. While forecasting consists of estimates of future conditions and possible outcomes, the process can encourage you to consider a range of potential scenarios and in that way position the company to capitalize on potential outcomes that appear most likely to occur or prepare the company to adapt to potentially challenging conditions if they arise. Forecasts are usually updated as new information becomes available, to promote accuracy and relevance.

Budgeting details how the financial plan will be carried out each month and addresses items such as revenue, expenses, debts and anticipated cash-flow. A budget is a forecast of revenue and expenses over a specified future period, typically one year, and details how the financial plan will be implemented each month. The budgeting process can be challenging, particularly if clients don’t pay on time and undermine cash-flow, or if sales revenue is intermittent or your sales cycle is long. It is acceptable to adjust your budget to reflect the actual amount of revenue received or compare actual financial statements to determine how close they are to meeting or exceeding the budgeted revenue and expenses. Once the budget period has ended, it is essential that you compare the forecasts to the actual numbers. It is at this stage that you’ll discover whether the budget aligned with the expected expenses and revenue.

  • Operating Budget: The operating budget includes the expenses and revenue generated from the day-to-day business operations of the company. The operating budget also represents the overhead and administrative costs directly tied to producing the company products and services.
  • Cash-flow budget: A cash-flow budget helps determine the amount of cash generated by the company during a specific period. The company’s inflow and outflow of cash is critical because timely payment of expenses is dependent on cash that is both generated and available. Monitoring and encouraging the collection of accounts receivables helps you forecast the income that is due in a particular period.
  • Strategic Forecast: A spark of inspiration may strike like lightening and you might be amazed by your own creativity. If you’re serious about bringing your brilliant idea into reality, you’ll test its potential viability with strategic forecasting; the goals you pursue be both realistic and most likely attainable. Strategic forecasting is integral to making that determination. In Step I, you’ll determine whether your goal should be a primary or secondary target and whether it is short-term (e.g., one year) or long-term (e.g., three years) initiative and address the question of what the business aspires to achieve by pursuing this goal. Next, you’ll define the market conditions that the company operates in, to further evaluate the capabilities and resources needed to take on the goal. In Step 2, you may find it helpful to categorize the strategies you’ll use to pursue your goal into functional strategies and operational strategies. Functional strategies refer to the action plans and tactics you’ll use to implement the strategies; operational strategies focus on resource allocation used to achieve the goal. If your goal passes muster in Step 3, you can then develop your strategy roadmap. A successful strategy will anticipate challenges that are endemic in today’s fast-moving economic environment and will integrate risk management and an agile approach that bakes in the ability to adjust your strategies as new trends, opportunities and—to be realistic—obstacles appear.

Pricing–how you price your products or services is based on factors such as market demand, customer behavior, competitors and market position. Identifying a pricing strategy capable of driving revenue and maximizing profit without alienating customers is critical; identifying the pricing sweet spot your service or product can be challenging. Begin your pricing strategy by determining your pricing objectives, e.g., maximizing profit, increasing market share, or stimulating client acquisition. 

Remember that pricing influences your ability to pursue, and achieve, business goals because it determines the sales revenue and is, in most cases the primary, if not sole, contributor to working capital and profit—the engine that keeps your entity solvent and sustainable. When evaluating potential business goals, examine and, when necessary, adjust your pricing to enable the company to generate sales revenue that’s capable of providing the financial foundation that will facilitate your ability to achieve the growth, scale or expansion goals that you envision.

Give yourself reliable data and insights that enable informed pricing decisions, rather than relying on intuition or outdated market info when determining prices. Avoid methods inclined to produce ineffective pricing strategies that are unlikely to access the full revenue generation possibilities of your services and products.

Finally, be aware that clients may be willing to pay a premium for services or products that possess what they feel is a desirable differentiating characteristic. A unique characteristic may be perceived as a competitive advantage that sets your service or product apart from what is offered by other vendors—sustainability, for instance. Furthermore, clients are not infrequently willing to pay a premium to do business with a brand they consider trustworthy or prestigious. Below are pricing strategies and factors to keep in mind.

  • Cost-plus pricing is based on the cost and value of the time and effort (talent) required to develop your B2B solutions, or source/manufacture B2B or B2C products. From there, a profit margin that target clients will presumably accept is added, to create the selling price.
  • Value-based pricing is particularly attractive in that it reflects the maximum amount clients are willing to pay, and minimizes the focus on service or product production or acquisition coat, which might be difficult to calculate when developing B2B solutions.
  • Tiered pricing targets different customer segments and may produce additional revenue from those willing to pay a premium for upgrades and add-on features, or offer volume discounts to attract clients who have higher consumption rates.

Thanks for reading,

Kim

Image: Quentin Metsys (Flemish, 1465/1466-1530) The Money Changer and his Wife (1514) courtesy of the Louvre Museum in Paris, France.

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Business Forecasting Helps You Make Money

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Summer 2017 will officially arrive on June 21 and the warm temperatures promise to seduce us with sunshine and flowers. Summer is the primary vacation season and many businesses slow down with its arrival , with the exception of tourist industry service providers and wedding planners and their usual sub-contractors: caterers, florists, photographers, DJs and videographers, many of whom are Freelancers.  The rest of us, however, have to get creative and try to maintain our discipline and resolve as the heat and humidity conspire against ambition.  This lovely time of year can present a real financial challenge for Freelancers.  How can we remain productive and scare up some billable hours? Summer is the ideal time to devote attention to positioning  your venture to make money in the fourth quarter and beyond.

I suggest that you conduct business forecasting at your organization this summer. Business forecasting is the cornerstone of business planning and business planning is the foundation of enabling business profitability.  Forecasting helps business owners and Freelancers to objectively examine the monetary value of each revenue stream that the venture generates, so that it becomes very clear which lines of business are making money and the amount of profitability of each line.  Forecasting shows you where you should devote your resources and in that way generate increased billable hours, revenues and profits.

Forecasting in your Freelance venture is crucial: client work, teaching assignments, writing assignments, subcontracting work for other Freelancers and maybe even an under-the-radar odd job along the way to fatten the coffers are among the business activities in which we engage to maintain cash-flow.  It’s very useful to know which of these lines of business is worth more attention and those that you may want to drop, since the returns are meager.

Let’s face reality—we B2B Freelance service providers often don’t know when our next client will come along, or what s/he will want to spend on services when that happens.  It’s so easy to wind up scrambling from new client to new client without getting much repeat business, or adequate control over our earning capacity. That’s why it’s vital that we:

  1. Identify where the earning potential really is (and it might not be client work)
  2. Create strategies and action plans that promote successful participation in those of your business activities that are the most profitable

There are thousands of Freelancers who make their real money not from client work, which can be both scarce and erratic, but on other related business lines.  For hiilucky Freelancers who have national renown, that could be book sales, paid speaking engagements and paid writing assignments.  For others, it’s their coaching business that is the real profit engine.  In such cases, the client work is necessary to lend credibility and enable access to the other, much more profitable, activities.

So how does one conduct business forecasting? If you use Intuit QuickBooks software, you can build a model on that system.  If you have at least three or four years’ of client data in QuickBooks, you will receive much valuable, actionable information about your business, including:

  • Profitability and profit margins
  • Average revenue /client
  • Average billable hours /client

If you keep your financial data on Excel, review the past five years’ of invoices (or as far back as possible in a newer venture) and identify your top five or ten most lucrative revenue streams, whether that is client work or other related projects.  Invoice dates will reveal seasonal revenue generating patterns and the invoices will remind you of which of your services sells the most and which the least.  Billable hours and hourly or project fee rates should also be noted. It will take longer to generate the data, but as with QuickBooks, much valuable and actionable data can be extracted from your Excel based financials.

There are two basic methods of business forecasting, Qualitative and Quantitative. Qualitative forecasting models are based on market research and they’re most effective in predicting short-term cycles. Quantitative forecasting models are based on data and the approach is more effective than the qualitative model in predicting long-term cycles.

There are various types of quantitative forecasting approaches and for small and medium size business forecasting, the Time Series Method is most useful.  The Time Series Method uses historical financial data to predict future results.  When you go to your bank for a business loan and five years’ of your financials are requested, the loan officer is using the Time Series Method to predict whether you will be able to generate enough cash-flow and sales revenues to repay the loan on time.

Once you have your financials in hand, Step 2 of Business Forecasting is the development of a marketing plan that contains strategies and action plans that create the road map that your organization will follow as you seek to expand those business lines that generate the most revenues for you and consider dropping those that perform poorly.

When you see with irrefutable data that reveals which of your services brings home the most money, you will likely get a clearer picture of your ideal clients and the messages and marketing platforms that resonate with them.  An amended pricing strategy and/or sales distribution method may be instituted, as might tweaking of your business model.

Business forecasting reveals patterns in client activity that are often overlooked and the process allows you to anticipate demand for your services, reveals which services historically have produced the greatest sales revenues, reveals the types of clients that spend the most with you and in general, shows on what side the toast is buttered.

With objective confirmation of your best client categories and most popular services, you can concentrate on how to access those clients, including bigger budget clients within the categories and you’ll know how best to sell to them.  You will work not only hard, but also smart, to grow your client list and increase billable hours, revenues and profits and that will be the best use of your time during this glorious summer.

Thanks for reading,

Kim