Cash Flow Budget - PDF by czi13167


									                            Cash Flow & Budget
Scott: Good afternoon, everyone. This is Scott Letourneau, CEO of Nevada Corporate
Planners. Again, a very important teleseminar this afternoon on the importance of a budget and
cash flow statement for your business.
Today, I have a very special guest, our own CPA from Las Vegas, who’s had many years of
experience, Mr. Brad Watts.
Brad, welcome today.
Brad: Thanks.
Scott: Brad, we’re going to talk about the importance of a business starting off on the right
track, how to get off on the fast track of success and getting off to a fast start for their business.
And again, we’re trying to avoid becoming a statistic – 95% of business owners fail after 5 years.
One of the things that I’ve seen over the years is very few business owners start from day one
and have a budget and cash flow statement for their first year of business and each year after
In your opinion, from an accounting point of view, why is the budget and cash flow statement so
important to a new business owner?
Brad: The budget and cash flow statement provide 2 important tools to the business owner, so
that he doesn’t get in trouble.
We’re all concerned about whether we’re going to make money or we’re going to lose money.
The budget allows us to see if the actual operations are following what we thought would
happen. So, that’s an operational look at things.
Why is my automobile expense $1,000, when I only thought it was going to be $500? These are
the questions that a budget will bring up to the business owner, so that he can do what is called
variance analyses. That means that he focuses on the things that are not working out like he
The cash flow projection or the cash flow statement, this is a very critical statement, because
aside from the budget, what it says is, “I’m going to receive $X during this 12-month period and
I’m going to spend $X during that 12-month period.
Now, the thing that it does for the business owner is it will identify months or periods where his
receipts may not be equal to his disbursements. Maybe he’s going to buy a lot of inventory or
he’s going to make an equipment purchase, or any type of expense that might be abnormally
high might push his cash needs beyond what are going to be provided by the business.

Cash Flow & Budget 3-24-07.doc                                                                Page 1 of 5
That means that he’s going to either have to invest money or get a loan. The business owner
needs to be proactive and anticipate those things. That’s where the cash flow statement comes
into play.
Scott: That makes sense, because I think a lot of people, without these tools, they find
themselves at the end of the month, when rent is due or they have to pay themselves, they find
themselves in a jam and having to perhaps max out high-interest rate credit cards or things to get
extra money because they weren’t prepared. Right?
Brad: That’s absolutely true. We all know that banks like to give you money when you don’t
need it, not when you need it.
Scott: Correct. An inverse relationship there, it looks like. So, it’s very important that the
budget is the forecast of what you expect to do this year. So, when you have that in place and
you’re using QuickBooks, you can look at the actual. And that’s where you’ve got to ask
yourself those tough questions. Why was I so far off? Why are my sales 40% short? Maybe
they have to go in and evaluate, “I thought I was going to get 20 prospects and I thought I was
going to have a closing ratio of 20%. My closing ratio was actually only 8%, and my average
sale was a lot less.” Is that the type of evaluation that could possibly go on during this process?
Brad: That’s exactly the evaluation that goes on. What the business owner needs to realize is
that this is a roadmap that gives him the ability to look and see how he’s doing going forward.
Nothing here is in concrete, it’s just a way to identify problems and then make corrective action.
We all know the story about when they went to the moon, that they were off-course 98% of the
time. Most business owners are not going to hit their budget exactly right. That’s what the
budget’s there for. It’s there to identify problem areas and then make corrections.
Scott: That’s a great point. The same thing is used in airplanes flying on a trip. They know
where their outcome is. They know they want to go from Las Vegas to Hawaii, but they make
minor adjustments along the way to get back on track.
I agree, it’s a very important tool to keep you on track for your business in financially what
happens. Especially, it’s important when you have a partner, because it requires some serious
discussion. It’s one thing if you fail to make it happen yourself. You can probably deal with
that. But if you have a partner and someone else involved, the 2 people really need to
communicate to make sure they’re on track. Right?
Brad: That’s absolutely true.
Scott: What are some of the key indicators one should look for within a budget and cash flow
statement, maybe a couple comments about each that are going to be the key areas they should
focus on?
Brad: On the budget, there’s particular expenses there that are going to vary. We’ve talked
about those before. There’s expenses there that will vary along with the income activities.
Those are critical areas, because if those are not what we think they should have been, then
something is really wrong. Because we should know those costs. And when they vary, that
means we have a serious problem.

Cash Flow & Budget 3-24-07.doc                                                             Page 2 of 5
The other things on the budget, like telephone and office, those should not vary that much. So,
they’re going to require less attention – not that you’d want to ignore them, because sometimes
those are off and it’s because something has been put in the wrong place.
But you want to pay particular attention to those expenses that should have a direct relationship
with the sales. And if they’re not where you think they ought to be, then you need to do some
serious analysis and figure out why.
Scott: How about for cash flow? What are some key areas in cash flow that one should focus
Brad: On cash flow, the thing to obviously keep in mind there, or to watch for when you project
out, is the months that, for some reason, end up showing a negative amount, where it would
require additional capitalization or money – loans, possibly.
Scott: I suppose, Brad, also comes into play you’ve got to know when your bills are due.
Brad: Absolutely. And that’s where the accounts payable and the due date QuickBooks helps
forecast that out for you. Those numbers should pop up in the correct place on the cash flow
statement, of course. It’s more than just knowing the bills and what they are, it’s putting them in
the proper timeframe. Absolutely.
Scott: That makes sense. And I think it’s interesting, because a lot of times the difference
between making it and going out of business is not like you had to be short $100,000. Usually,
it’s being off-track in these couple areas and not checking in to your roadmap. I feel perhaps a
lot of successful companies never even got past first base because of not focusing on these tools.
Would you agree with that?
Brad: I would agree with that. I don’t know how you could be in business over the long term, if
you’re not actually comparing what is going on with what should be going on.
Scott: And I know sometimes I’ve heard these statements, “The numbers don’t lie.” And I
think sometimes people just don’t want to deal with the reality of it’s not going as well as they
projected, and that’s where the business owner may have to work on a weekend or whatever it
takes to get ahead of the ballgame.
But it’s the non-emotional feedback that’s going to be the score of the game at the end of the
day. Right?
Brad: That’s correct. You’ve got to have the information. You see the result. If there’s a
problem, deal with it. Fix it and move on. You’ll end up making some money, but there’s going
to be bumps in the road.
Scott: And I think once you get beyond this and you’re aware of this, one of the reasons, at
NCP, we’ve gone out and negotiated contracts and relationships with things like merchant
account providers, payroll services and other companies of that nature is to save people some

Cash Flow & Budget 3-24-07.doc                                                            Page 3 of 5
A lot of times, it’s 2% or 3% here or there, 8% less here. Those things add up and could be the
difference of a profit at the end of the year or a loss.
So, I just want everybody to keep that mind also, especially if you feel the numbers are going to
be tight. Not everybody has a very high profit margin type business. If the numbers are tight, I
think this type of planning is even more important, to help keep you on track, that give you the
likelihood of being successful.
Brad, let me ask you this. How often should someone update the budget? How does that come
into play, versus do you sit down each month and look at your budget and what happened and
make some adjustments? Do you do it quarterly? What would you recommend?
Brad: I think the monthly is the ideal time to look at the budget and see what’s going on.
Scott: And then when you have a budget done, if you have to make some adjustments at the end
of the month, that can extrapolate out at the end of the year. Right? Make some changes,
because it’s usually on some kind of a spreadsheet that will automatically do that for you?
Brad: There’s always changes to the budget.
Scott: Okay, great. What items should the business owner have in place as they work on their
budget and cash flow? I know with our program, they’ll be working with your firm to get this up
and running. What type of things should they be thinking about before they put this in place for
the year?
Brad: Well, they need to be thinking about the income, the expenses, projected sales, and the
costs that go along with those sales.
A lot of times, when you sit down and do that type of analysis on what you think is going to
occur, then additional things pop up, questions, and we can answer those questions and help
produce a budget that is actually meaningful.
Scott: And then, I suppose it’s a powerful tool to help make business decisions. If they’re going
to spend more on marketing, they want to go to a big seminar, or they want to invest in more
training, maybe they want to hire an internet person, obviously the budget would tell them the
additional expenses and, of course, the expected increase in profit. And I suppose 30 or 60 days
later, if those things aren’t going on track, this is a powerful tool to give them some feedback.
Brad: That’s exactly right.
Scott: And that’s what I see, Brad, so often, is the business owners get started and I think what
goes through their mind is, “Things are tight, I have a limited budget, I’m going to start this
business,” but this is almost something you can’t afford not to do. Would you agree with that?
Brad: I would agree wholeheartedly with that. Too often, people think, “Well, it’s not working
out. We’ll give it another month,” hoping, rather than analyzing what is going on and fixing it.
Scott: And I think that’s where it comes back to if you’re using your bank statements or the
online balance as the only tool to evaluate how your business is going, the odds are against you
to begin with. It’s really putting yourself behind the 8-ball.

Cash Flow & Budget 3-24-07.doc                                                           Page 4 of 5
Brad: That’s definitely a prescription for disaster. I would agree with that.
Scott: What would be the typical process to set up a budget and cash flow? Is that something
where someone would email the data to you or they would talk to your firm over the phone to get
that information? How would that typically happen?
Brad: What would happen in that case is they would receive basically a blank format with some
standard items on there, and they would fill those in based on what they think should occur.
Then, if we have some additional insight into those numbers, when we got them back, then we
would probably ask a few more questions.
But basically, they get a blank format, fill in some numbers, and then we project those out on the
budget. And then, we start looking at actual results.
Scott: That makes a lot of sense, and it puts you in a position to make an evaluation, say at the
end of the month or the second month, or especially at the end of the quarter, to see if we’re on
track with what was projected.
Brad: That’s right.
Scott: Alright, sounds great. Brad, I appreciate it, again. This has been tremendous. I think
such a powerful tool that large corporations, of course, they do this all the time. The small
business owner, they get focused on so many things.
Our goal, at NCP, is to help the business owner get off to a fast start and really focus on doing
what they do best, which is bring in revenue. And let us, through firms like yourself, help you
with these tools, to give you a better opportunity to be successful.
So again, Brad, appreciate your time today. Thank you once again.
Brad: Thanks a lot.

Cash Flow & Budget 3-24-07.doc                                                            Page 5 of 5

To top