Confront Reality: First Steps to Financial Success in Business

October 13, 2015

This is part two in a series on An Achievable 10-Step Plan for Winning Financial Success in Business

In my previous post, I provided 10 steps to financial success in business—a process to help guide you on your path to building a financially strong  business. The power of this financial roadmap is it turns financial management (an often complex and confusing topic) into an organized, methodical plan that is much easier to wrap your mind around.

This financial roadmap provides direction for your financial decisions. It will make it easy to monitor progress toward achieving your financial goals for your business—and it can be implemented in small steps.


Confront Your Financial Reality

In this post, we will go into more detail about steps 1 – 4. This is the phase referred to as, "Confronting your financial reality."

The first four steps in the 10-step financial plan will reveal a lot about the financial health of your business. You’ll be amazed what you learn in a very short period of time about where you stand right now (financially speaking).

Step 1: Build Your Cash Balance to One Month of Operating Expenses

To implement step 1, you first need to determine the number that approximates one month of operating expenses. I exclude cost of goods sold (unless you have employee expenses or other operating type expenses in cost of goods sold).

With that number defined, you can determine whether you already have one month of operating expenses in the bank. If you do then check Step 1 as complete. On to Step 2.

If you are short of the one-month target, then put a dollar amount on how much cash you need to “find.” Let’s say your monthly operating expenses are in the $250,000 range and your bank balance has been hovering around $150,000. (That means you probably only have a couple weeks of payroll and recurring expenses in the bank. That’s way too close for comfort.)

In this example, your goal is to add $100,000 to your cash balance. Now you have to ask yourself two thought-provoking questions (in this order):

  1. How fast can I come up with an extra $100,000?
  2. Where is the $100,000 going to come from?

I love these two questions because they generate fascinating reactions and thoughts in your mind. The first question forces you to consider just how long it may take you to achieve your financial goal. One month? Two months? Twelve months? The second question puts your focus on where you’re going to generate the cash from to meet that goal.

Sometimes the goal looks easy and the answer is obvious. Other times it creates dread and fear. Either way, there’s no need to solve the problem just yet. Just spend a little time thinking about how you are going to build your cash balance. Then on to step 2.

[NOTE: If you have a bank line of credit (LOC), and use your cash to pay down the LOC daily, it’s okay to move directly to step 2. You will dig deeper into how you are using the LOC—and your availability under the LOC—in steps 3, 4, and 5.]

Step 2: Put Aside Enough Cash to Pay Your Income Taxes

To implement Step 2, you need to:

  • Estimate your income tax expense for the year
  • Look at how much cash you have already put aside for income taxes
  • Determine the amount of cash, if any, that still needs to be put aside

Let’s say it’s November and your tax year ends in December. You estimate your taxable income for the year will be $1,000,000. Using 40% as an estimate of the tax rate, that means your tax expense is estimated at $400,000. What you have put aside already (in this case, through estimated tax payments) is $325,000. That means you have $75,000 of cash that needs to be set aside so you have a total of $400,000 put away for income taxes.  

Step 3: Diagnose Your Profitability & Cash Flow Weaknesses (Then Fix Them)

To implement Step 3, you need to:

  • Understand Where the Cash Has Been Going.

Do this by completing the Cash Flow Focus Report for the current YTD period and for the prior year. The focus report is a fast way to highlight the three to five largest drivers of cash for those periods, provide a one-line description for each driver (for each of the large changes in cash), and decide whether each change is good or bad. This is one of the fastest ways to zero in on what’s really going on with your cash flow. You will be surprised how quickly it points you to problem areas (and therefore to opportunities) for your business.

  • Create the Profitability Gap Analysis.

The purpose of this analysis is to quickly determine if your business is as profitable as it should—or could—be.

For example, in one company the owner became frustrated because cash was always tight despite the fact that they had made big strides in becoming profitable over the last two years. After completing the analysis, it turns out that profits were only 4% of sales in a business where the norm is closer to 10%. At $4,000,000 in revenues, that meant their Profitability Gap was $240,000 (10% - 4% x $4,000,000). Now they had put a number on the profit improvement target (the opportunity). The mission became, “closing the profitability gap.”

  • Create the Cash Trap Analysis.

In this analysis, you will find where cash may be “trapped” on your balance sheet. Focus on inventory, accounts receivable, and accounts payable. These working capital-related accounts oftentimes hide opportunities and problems because most entrepreneurs tend to pay little attention to them month-to-month.

Step 4: Create a Reliable Financial Forecast for the Next 6-18 Months

It is impossible to run a business intelligently without a clear view through the financial windshield of your business. A reliable financial forecast for business shines the light on both the opportunities and the dangers for your business that lie ahead.

Your financial forecast for business becomes a tool you update every month. It becomes a part of your Monthly Financial Rhythm. First get a clear view of profitability and cash flow over the next six months. In creating your first financial forecast, focus on the next six months, before forecasting for 18 months out.

Reality is Your Friend

Implementing steps 1–4 helps you get up close and personal with the financial reality of your business. Financially speaking, it provides you a clearer view of where your business has been, where it is now, and where it needs to go next.

You have targets to achieve (with dollar amounts attached to each one). The hard work, of course, is creating an action plan to hit the targets, to achieve the goals. But now you have clarity and concrete targets to achieve. Sometimes getting clear about the results that need to be achieved is half the battle.

In the  next post of this series, we will walk through steps 5–7 in the Acheiveable 10-Step Plan for Winning Financial Success in Business Series. This phase of the plan examines how to create a financial safety net for your business.

cash management guide

Topics: Business Best Practices, Accounting & Finance

Philip Campbell

Consultant, Author

Philip Campbell is a CPA, consultant, and author of the book A Quick Start Guide to Financial Forecasting: Discover the Secret to Driving Growth, Profitability, and Cash Flow Higher. This new book provides a straightforward, easy-to-understand guide to one of the most powerful financial tools in business: a reliable financial forecast. He is also the author of the book Never Run Out of Cash: The 10 Cash Flow Rules You Can’t Afford to Ignore. The book is a step-by-step guide for business owners and managers who want to better understand and manage their cash flow. Since 1990, Philip has served as a financial officer in a number of growing companies with revenues ranging from $5,000,000 million to over $1,000,000,000. He has been involved in the acquisition or sale of 33 companies (and counting) as well as an IPO on the New York Stock Exchange. Philip loves helping entrepreneurs and business owners think strategically about the financial side of their business. His consulting work is focused on providing the financial insights that leaders need to increase profits, improve cash flow, and enjoy the fruits of financial success in business. What really sets Philip apart from the average financial person you meet is his passion and excitement about helping entrepreneurs and CEOs take control of their cash flow. In fact, early on in his career, he focused and “preached” so much about the importance of cash flow that people now call him CASH. Philip is the founder of Financial Rhythm, a website devoted to people who are serious about creating financial health, wealth, and freedom in their business. If you're an entrepreneur or business owner, Financial Rhythm is a place to get simple, actionable strategies for creating a financial future that is bigger and brighter than your past. Philip lives in Austin, Texas. You can email Philip at
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