What’s that secret genius character shared within the circle of all successful entrepreneurs?
Being crazily good with numbers.
They are always day-dreaming about how to zero-in on those profit-sapping taxes.
That is a thousand steps ahead of merely improving the quality of your products/services or fleshing out the holy grail of marketing strategies that convert like a charm.
But you don’t essentially need to wrap your head around all the books alive for that.
Right here, I will show you ways to cut your tax bills driving profitability using cash flow, pro forma, balance sheets, and income statements.
Let’s drill in.
Income Statement VS Pro Forma Income Statement
If you don’t know what a pro forma is or how to create one, I suggest you read our fully-detailed article on creating a pro forma financial statement here. Done that? Great. As a multi-tasking entrepreneur, cutting out a specific time or schedule to work around your monthly income statement may not be easy. Did you notice that you just postponed last month’s income statement for the coming month? And if you get someone from your staff to do it, they can be just as busy doing other seemingly important things like increasing productivity. Right? The best thing to do is to employ an expert on a hire-fire basis for that. This individual is then charged with something I call variance analysis. The variance analysis, at the basic, is a comparison of your projected income (your pro forma income statement) with your true monthly income statement. With it, you are able to confirm if you’re meeting your monthly target or not. You are also able to see at what angle is the wind blowing your arrow off target. Are you spending more on Facebook ads whilst ROI still remains the same? Maybe you just need to consider an alternative social media marketing platform.
Cash Flow Pro Forma
What’s worse than being a sponge in a pineapple under a sea? Cash flow crisis, I’d say. A cash flow crisis is a situation whereby you have more outflow than inflow of cash. In an earlier post, I called this negative cash flow. Remember? Great. While it may turn out to be impossible to not experience a negative cash flow, a cash flow pro forma is the next holy grail. Yay! By simply projecting your sources of cash and the projectile points where cash ends when it flows out of your business, you stay at the top of your game. All you have to do is compare your cash flow pro forma with your actual monthly cash flow to see where the boat is leaking. But knowing is not enough. Taking action is. Get a financial advisor immediately to guide you through targeting ground-solid cash sources. Let them advise you on whether to get a loan or not. In most cases, though, all there is to be done is to cut down on those extra or blind spendings.
Pro Forma Balance Sheet
Here’s the traditional hard and fast rule. Create a monthly balance sheet. Flash news! You don’t need that. In fact, if you are accustomed to toiling around receivables and inventories now and then you will never get to do your monthly balance sheet. So, just avoid the illusion and instead do it the shortcut by creating an annual balance sheet. Your annual balance sheet will give you a full-blown picture of your business net worth versus the health status of your business finances. You’re able to know if and where debts are rolling in. But mind you, as a partnership, you can’t escape creating your monthly balance sheet as requested by tax authorities. Right? Also, if you are getting loans from the bank, creating your balance sheet every month is important, as it is a requirement by all banks.
Setting Your Profit Goal In Stone
You’ve probably been told enough for a lifetime that being flexible, versatile, and a superhuman in this dynamic of a thing are all the important characteristics of a successful entrepreneur. But in there are a lot of benefits to being solid and static in some areas. Such is your income or profit goals. Setting an ambitious profit goal shouldn’t be taken lightly. Set a realistic profit goal in an aggressive fashion. Project the volume of sales that should be made to hit your profit goals. Have a document where you stretch out your projected expenses in full detail. See if your initial profit goal is too aggressive and bulldozer out a way to cut it down to a reasonable level. After the needful adjustment is made, make a projection of your losses and as well project how to manage them intelligently. All of these projections can be made every month or annually depending on your time management, risk management, and the nature of your business. I’d say that you should make a cash flow projection as well. It’s been saving companies for decades.
Sit On Real Numbers
Heads up! If numbers are just not your thing, get an expert to fill in. Next up, be realistic about all your pro forma(s). Don’t just bounce numbers off of your head. Perform the actual calculations. Ensure that your projected cash inflow is well-thought-out and based on logic and analysis. The same goes for your cash outflow, income statement pro forma, and others. Again, be sure that you’re exceptionally good with numbers before doing this on your own.
Conclusion
Getting around with numbers makes a whole lot of difference. It can just be the missing piece in the puzzle of your ebbing business. It allows you to see those tight corners and shed light upon where you’re getting things wrong in terms of actual expenses versus budgets. In this article, I have explained some of the ways you can increase profitability by just doing your numbers right with pro forma, cash flow, balance sheets, and income statements. I hope this helps.
