Jessica Quindlen: [00:00:00] Welcome back to the Sound Cents podcast. I'm Jessica Quindlen. Today we're discussing small business financial planning. I have Vicki Yates, our Director of Business Banking. Hi, Vicki.
Vicki Yates: Hello.
Jessica Quindlen: And Pam Jones, our Senior Development Coordinator and also former small business owner. Hello, Pam.
Pam Jones: Good morning.
Jessica Quindlen: All right, let's get started. Why is financial planning so crucial for small business success?
Vicki Yates: I think financial planning is essential for small business success because it provides a clear road map for businesses’ financial health. It helps manage resources effectively and ensures that the business can weather both the good and challenging times.
So we try to help with goal setting. You want to guide in your decision making. Knowing where your business stands financially helps you make informed decisions about investments and so forth. And, it's good to work on cash flow management, minimize financial risks, and then attract investors or lenders towards your business.
Pam Jones: I agree 100%. I think one of the most important things that I learned as a small business owner is that anything and everything can happen all [00:01:00] in one day, so you have to make sure you have a plan in place for when those things happen to pop up. It may be equipment failure. It may be needing to hire additional staff. It could be a wide variety of things, but if you don't have a strategic plan in place, then it's going to make it very difficult for you to continue to have that cash flow to be successful.
Jessica Quindlen: I love that. What are the first steps a small business owner should take when creating a financial plan?
Vicki Yates: Define your business goals, whether that's growing revenue, expanding into new markets or launching a new product. If you have clear goals that will help shape the financial strategy for you.
Then, assess your current financial situation. You want to analyze your income, your expenses, profits and losses. Look at your cashflow, debt and other key financial metrics.
And lastly, I would create financial projections. Project your revenue, your expenses, and profit over the next one to three years, and consider your best and worst case scenarios, and of course, plan for expected scenarios as well.
Pam Jones: One of the [00:02:00] other things that I did when I was looking at purchasing a small business was I really took into consideration what the market like in the downtown area. Was there another shop that was doing something similar than I was? You have to really consider all aspects. What is traffic flow? You can get all of that information from the Small Business Development Center. You can also assess whether or not your staffing needs are going to be filled. Or if you're going to have to look at other sources for staffing outside of what maybe they suggest.
Jessica Quindlen: What budgeting strategies can help small business owners stay on top of their expenses?
Vicki Yates: A zero-based budgeting system is a good idea. You can start from scratch each month and allocate funds to every expense, ensuring that every dollar is accounted for so you're not overspending in any area.
Also, budgeting software is a great idea. There are several software tools like QuickBooks and FreshBooks. They can help you track expenses in real time and help identify [00:03:00] areas where costs can be reduced.
And lastly, I'd say plan for the unexpected. Always leave room in your budget for the unexpected costs to avoid any financial stress.
Pam Jones: I think that's the number one thing that I would recommend for anyone looking at getting into owning a small business. Make sure you have a safety net savings or an emergency savings because she's exactly right. There's always going to be something that pops up that you just don't expect.
I also used QuickBooks, but I also, incorporated the use of an accountant. However, I think that there are other tools that can be utilized that maybe wouldn't be as expensive as an accountant. And I think that you have to really do your research and understand what your financial institution offers because I think they can offer items that would be less expensive.
Jessica Quindlen: How can business owners improve their cash flow management, especially during a slow season?
Vicki Yates: Building cash reserves is really important, so it's important to save during profitable months so that you have a cushion during the slow season. This reserve can act as a financial buffer [00:04:00] which will allow you to have less stress.
You can also consider offering discounts for early payments or implement stricter payment terms, so you encourage quicker payments.
Review your expenses, diversify your revenue streams, and invoice promptly. If you invoice promptly, you're ensuring your invoice process is efficient and timely because late invoices can delay cash inflows.
Jessica Quindlen: Did you ever experience slow seasons?
Pam Jones: Oh my goodness. A slow season could be from one day to the next.
Jessica Quindlen: That's fair, yes.
Pam Jones: It's so interesting in Colorado, as a small business owner, you have to take in consideration the weather. And that was probably something that I didn't quite anticipate. I had a food truck in addition to the brick-and-mortar business, and one of the things that I became very dependent upon was the sales that I was earning from the food truck.
But if there's a snowstorm, then a soccer match may be canceled. And I would have ordered in additional food. I would've brought in additional staff. And [00:05:00] I think that one of the things that I learned was your planning has to be day to day, but it also has to be long term. You always have to be looking for what is going to happen next.
And that can be positive things as well. It could be that you get an offer for something. It could be a good thing as well, but you always have to be planning and having that extra reserves just in case there's that slow day when you have all these extra staff that you've hired or brought on for an event that you don't actually end up going to.
Jessica Quindlen: Absolutely. I love it. You keep bringing up these things that are financially related but not actually financial like weather and traffic flow and things. I know I initially, thinking about business, wouldn't think about, but of course, a restaurant, especially a food truck, would worry about the weather or traffic flow for a location.
It's just very interesting. How can small businesses financially prepare for scaling and expansion?
Vicki Yates: Sure, you want to ensure consistent cash flow. So, before scaling, you want to make sure your cash flow is steady enough to handle [00:06:00] increased expenses and plan for additional financing. Expansion often requires additional capital, research funding options like small business loans, grants or finding additional investors.
Lastly, you'd want to monitor your profit margins. Keep a close eye on your profit margins to make sure you're growing profitably.
Pam Jones: I couldn't agree more. I think one of the things you definitely have to do as a small business owner is always have your eye on what is coming.
When I was looking expanding with the food truck, that was an additional $28,000 that I had to invest. If it hadn't been for my accountant and my financial institution, there's no way that my dream of bringing a food truck on would have been a reality. But in turn, the monies that I made from that expansion were very helpful and ended up making the business far more successful.
Jessica Quindlen: I love that. That's fantastic. How can business owners protect themselves and their assets financially?
Vicki Yates: An emergency fund is great. Set aside funds that can cover at least three to six months of your [00:07:00] operating expenses. This way you're protecting your business during tough times and gives you time to adjust your strategy if you need to.
Lastly, would be separate business and personal finances. This is a good idea to protect your personal assets and keep your business account separate from personal.
Pam Jones: I couldn't agree more. Make sure that you have an emergency fund.
And lastly, it is crucial that you keep your personal and your business finances separate. As a certified financial coach, I have coached several individuals recently that have commingled their personal and their business finances, and the result is going to be a personal bankruptcy. And I believe that if they had come to us earlier in the development of the business or the development of the expansion of purchasing a second restaurant, I believe that we would've been able to help them maybe talk with a different type of [00:08:00] business banker and establish the separate funds. But unfortunately, if you don't do that, I think that it can end in bankruptcy for you as a person
Jessica Quindlen: That's very good advice. I'm sorry to hear that. Speaking of separating personal and business, what is the best way to do that effectively, so that it doesn't feel completely overwhelming that they're separate?
Vicki Yates: Sure. It's really important that you open separate business accounts, so use a dedicated business checking account and savings account to keep your finances separated. Get a business credit card and use it only for business related expenses. This will help you track your business spending and then help you avoid mixing personal and business finances.
Also, pay yourself a salary, set a consistent salary for yourself instead of drawing funds as needed. This will help you budget personally and keeps your business finances clear. You can use an accounting software as we've mentioned. You can also consult a tax professional. But by integrating these strategies, small business owners can achieve better financial control and avoid costly [00:09:00] mistakes and set yourselves up for long term success and growth.
Jessica Quindlen: I love that. And really quick, when you say dedicated accounts, you don't mean institutions. For example, you would have a checking account here, a personal, and then a business.
Vicki Yates: Yes, exactly.
Pam Jones: At Ent, I had a business account and I had a personal account, but I could use online banking to do most of my transactions. If I needed to transfer funds between the business account and the personal account, it was as simple as going into online banking.
The other thing is, I think that seeing an accountant or a tax professional or even an attorney at the start will help you decide how you're going to pay yourself because there are different strategies based on how many years you have contributed to Social Security. So it's very important to speak to someone.
Separating the personal and business finances is also crucial when you're filing taxes as a business owner. [00:10:00] And I highly recommend using some sort of software to do that, in addition to the different types of banking, i.e. business banking and personal banking.
Jessica Quindlen: That brings us to the end of our show. Vicki, Pam, thanks so much for being here. It was wonderful having you.
Vicki Yates: Thank you.
Pam Jones: Thank you.
Jessica Quindlen: Don't forget, April is Financial Literacy Month! Be sure to tune in to our next episode to learn how you can celebrate with us. And now for our new segment brought to you by Dave Logan, the iconic voice of the Denver Broncos.
Dave Logan: Hi, this is Dave Logan, and it's time for your 2 Minute Money Drill. A quick tip to help you make smart money moves fast. Whether you're planning to save or looking for ways to get ahead, here's a financial play you can put into action right now.
Never miss a payment by setting up reminders or automatic payments for your bills. It's a simple move that helps you avoid late fees and protects your credit score because staying on top of your bills is just as important as keeping your eye on the ball.
Jessica Quindlen: Thank you for listening to Sound Cents from Ent Credit Union. Be sure to follow our podcast as well as rate and review us. I'm Jessica Quindlen. I will see you next month. Same time, same place.[00:11:00]
