10. Why a Budget ISN'T ENOUGH to Manage Your Business Finances

🔮 Financial Forecasting: Predicting & Growing Your Business! 🔮

Ever wish you had a crystal ball to predict your business's financial future? Today, we're diving into financial forecasting—a powerful tool that helps you plan, pivot, and profit with confidence. 🚀

In This Episode, You'll Learn: ✅ Why financial forecasting is essential for business growth
✅ The difference between budgets, projections, and forecasts
✅ How to analyze past data to predict future trends
✅ The common financial mistakes business owners make (and how to avoid them)
✅ How to use forecasting to increase profits and avoid cash flow surprises

🔗 Resources & Links:
📌 Download the Free Financial Forecasting Template
📌 Email Tiffany: tiffany@energeticcfo.com

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Transcript

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Welcome to the Energetic CFO Podcast, where we empower you to take control of your financial future. I'm your host, Tiffany, an advocate for financial literacy and business success. In this podcast, we'll explore a wide range of financial topics from money mindset and budgeting to building wealth and achieving financial freedom. We'll break down complex financial concepts into simple, actionable steps so you can apply them in your own life. Whether you're a new entrepreneur or a seasoned business owner, this podcast is for you. Join me as we dive into the world of finance and discover the tools and strategies to help you achieve your financial goals. Let's get started! Have you ever wondered what your business financial future holds? Do you want the crystal ball to be able to predict your business's growth or potential challenges? Today we're going to break down the complex world of financial forecasting into simple, actionable steps. You'll learn how to create accurate forecasts and make informed decisions. Get ready to unlock the power of financial forecasting and take control of your financial destiny. In our business, we did a lot of goal setting, but not exactly a lot of financial forecasting when we were starting. And so much of what we were doing was budgets and what we thought we would make off of certain investments or moves in the business. But we weren't really relying on the past data to make decisions about future data. So we had clear goals of, okay, we need to make X amount of dollars per month. We need to add additional properties to do this, but we didn't have that view of, Hey, we could potentially transform this property into a different avenue and make more money. So by building out forecasts, as I spent more and more time looking at the business finances, We were able to make some shifts in our business that allowed us to leave our full time jobs a lot faster than a lot of people that we know because we had a clear picture of what was happening and we're able to use that as our crystal ball to make decisions about the future. So yes, we had a budget, but we also were using some forecasting and projections to make a more robust view of what was happening. So if you're struggling to predict your business's future, you're not alone and we've been there. Let's talk about how to create accurate financial forecast together. So know so many business owners have money coming in, money going out, they're focused on marketing and generating income and all of that is great. I mean, it's things you have to do in the business. But I think, honestly, I think marketing and sales is the sexy thing because you see the cash coming in. And we forget about the finances and how much we're keeping. And at the end of the day, cool, if you're making, you know, seven figures top line, but if you're only keeping 50, 000 of it, why it's not, what is it worth to you? That's so much work to not be able to keep a lot of that income. So if you're having a hard time looking at the data and predicting your future income and expenses, you're not alone. And it can lead to these uninformed business decisions where you're. Making purchases without knowing whether you really need it or can afford it. And you find yourself in those cash flow crunches where you're like, Oh crap, how am I going to pay this bill? We have been there and I've seen it in so many clients where we make decisions in the business thinking we're doing the right thing operationally, but we're not leveraging that financial data to make that decision. And having a clear forecast for your business will help you make the right decisions in the day to day operations. And it helps you to plan for the future so you know, can you take that vacation? Are you gonna have the income to support the things that you want to do? Not having that clear plan for future growth can lead you just confused and lost and not really know where you need to be headed. And really it comes down to not having the planning and forecasting in place. And last week we talked about some of those systems that you should have in place. Daily, weekly, monthly, quarterly, and annually. So once you have those habits and systems locked in, then you can start building your forecast. You also need to know what the heck you're looking at when you're looking at your profitability and your cash position. And that's why I created the financial clarity course, because I see so many small business owners that come in and they're doing an awesome job building their business and they're doing all the right things. But they're outsourcing the financial knowledge to somebody else, like their dad or their husband or a friend or their CPA, but they're not getting the results that they need from that person. So having that clear understanding, knowledge for yourself of those key financial metrics is so important. I've seen people have a hard time with analyzing the data and understanding the trends in the business and what's really happening. And having a budget is great, but honestly, let's be real. How many people actually stick to the budgets? I love watching Caleb Hammer or Ramit Sethi when they do these analyses on people's finances. And a lot of times they have no clue what's going on, but the ones that do have a budget they think they're following it, but they're not. And honestly, we have tried to implement budgets and we have a hard time following them because it just feels so constrictive what we like to do is really just look at the trends in our spending, whether it's personally or in the business and use that to steer the ship for future. So we're not necessarily saying we can only spend so many dollars in this area, but we're saying, Hey, we need to reduce spending here a little bit. And that really just gives us the clarity. To know where we need to go in the future. But the budget is just one small piece of it. The budget is looking at what's available to spend by the different buckets. We talk about the envelope system a lot, and that's a great system for cashflow management. And the budget is very similar in that regard, but looking at the trends and spending and seeing where we can cut is so important. And then finally, there might be a fear of the unknown and uncertainty about the future. I mean, what happens if sales decrease 10 percent or. If we have to increase wages or whatever the situation may be. So knowing clearly where your business is headed is so important. And let me be clear. We don't have the crystal ball for real. But we can use past data and the changes that we're making in our business. To build out these projections and these forecasts. And we know generally the direction the business is headed and it helps you to make better decisions as you're growing. And I have seen people that just rely on their intuition and their gut and say, I think this is the right direction to go. I think I should do this deal or I think I should make this investment or I don't need to hire that employee yet, but they're not using the solid data that's coming out of their business. I mean, there is such a gold mine that comes out of your business every month on your P and L and balance sheet. And if you're not leveraging that to make strategic decisions, whether it's planning for taxes, because taxes are 20 to 30 percent of your income. So if we can find ways to optimize that, that is a huge percentage that comes back to your bottom line. But if you're Just going with the flow and what you think feels right and not leveraging that hard data, you're missing so many opportunities to keep more of what you're making. And at the end of the day, do you really want to send your money up to DC or would you rather have it in your pocket to spend on your family or on the local community charities that you see in your community? I see people ignoring warning signs. Oh my goodness, like the clients I have worked with and I see them about to fall off a cliff and be in a spot where they're gonna be insolvent. They're not gonna be able to operate their business anymore, or they're failing, and they're, you know, up to their eyeballs in debt, or about to go up to their eyeballs in debt, and they don't see these warning signs. I like, just get this image of like the Roadrunner and Wild Coyote, and the coyote running off the mountain, and then, you know, he stands there for a minute, like so impractical, love cartoons, and then he falls. See it coming. I see the cliff. And I communicate that to them and we avoid it. But if they didn't have that support or the foresight to look at these things, they would fall off the cliff as well. And it's having these forecasts that really helps you to make the decisions. So I wanted to start, what is a forecast? Let's go back to the very basics. So you have your P and L and you have your budget and that's all great. We take that P and L and make it into a forecast. So what we do is we say, okay, on average, we're spending this amount on software. Generally in this month, we bring in this amount of money because there is seasonality in most businesses. And we look at basically what has happened in the past on a typical January or a typical month. And then we put that into our spreadsheet. And then from there, we're going to say, okay, but this year I expect my revenue to increase by. 5%, 20%, whatever it is. So then we increase our revenue by that amount. And then we say, Oh, but I'm not paying for that mastermind anymore. So we take that out of our bottom line expenses. Or, you know, I know this vendor has gotten more expensive. So my cost of services has gone up and creating that clear view of. Yes, this is what happened in the past, but here's how it's going to look in the future. And that will give you the way to see those warning signs and risks before they become, big issues. Finally, I see people not adapting to changes in the market. The world has changed over the last few years. In real estate, it's changing rapidly. I mean, the market is very different from when we were buying All of our houses and the online space is changing. AI is coming in. I mean, if you're not looking into AI right now, you're probably on your way to be coming behind in the changing market conditions in any business, because AI is going to change a lot of things in the world. And if you're not aware of these market conditions and these changes, you're not going to be able to build out a forecast or really operationally run your business in a way that's the most effective. So building this forecast is so key. And this is I love this stuff. So if you have questions on it please reach out because you'll make me happy. I love talking about this. It's like contingency planning. It's more room planning to me. Like I love it, but basically we're going to look at what do we think is going to happen in the business going forward? And having that lens allows you to make those clear decisions. So it's using that historical data. When we talk about the historical data, that's what you're getting from your bookkeeper and your accountant. And then we're going to use that to make these future decisions. What do you need to do? Have a financial forecasting process in place. This is something I like to do once a year. And we're in a great time of year to do that, at the beginning of the year. So we build out our forecast. And then we're going to go in and tweak it every month or so. To say, oh we didn't cut that expense. Or we added in this other thing. So you're updating it as you go with the actual data. And then tweaking future numbers. We're going to analyze all the data that we have to make sure that we're pulling in the right information. And then we're going to do some scenario and sensitivity analysis. So we can make copies of our spreadsheet with these forecasts and say, Hey, you know, what if revenue doesn't increase? What if it decreases? What does that do to my cash position and my profitability? So that's our sensitivity analysis scenario might be, Hey, what if we hire this person? And they double our income, but they only cost us, you know, 50, 000 a year. So we can run these analyses in this projection and I love making copies of them so you can have your original still there to see what do tweaks in your business. What are pulling the different levers do to increasing your profitability? Because at the end of the day, it doesn't matter what you make, it matters what you keep. And then we can also throw in some, you know, if you make these moves tax wise, here's what it does to your tax bill and things like that. And we want to make sure we're monitoring and adjusting this regularly. So you want to check in and make sure that it's still accurate. So this is not a once a year thing, set it and forget it. You want to make sure that you're doing it regularly. And then also checking in with your financial team to make sure that there's nothing you're missing. Because even in my business, like I'm an expert in this stuff, and I still rely on other individuals, whether they're in my team, other CFOs, or, external to my team to make sure that what I'm doing makes sense and aligns with where I want to go. So you want to embrace the power of data driven decision making. You have so much rich information coming out of your business and you want to make sure as you're making moves to invest in yourself and in your business, that they're aligned with where you want to be and that you have the cash to do it. And it allows you to plan for the future with confidence. And at the end of the day, it gives you a competitive advantage. Because if you're making a higher profit margin, you're able to make bigger moves personally and professionally than some of your competitors. And at the end of the day, what this really does for us is it reduces uncertainty and risk and the stress. I mean, the financial stress that I see on my clients is so big. So we want to anticipate what we see in the future because clarity is confidence. And you can proactively address these things so that you're handling it in real time instead of trying to fix something after it's been in place for two quarters. We make better decisions about how much we can invest in retirement tax moves. Having that regular check on your business finances to make those informed decisions is so important. And yes, we want to look at the historical data and what's been happening, but we also want to know what we expect to happen in the future and then adjust it as we go. And that's where pulling in that historical data is so important because it helps you to keep track of what's happening and what we expect to happen all in one place. And this pulls in components of the P& L. and the balance sheet in one view. So I know we've talked about this before, but when you look at your P& L, it's not a cash position calculator. It's not exactly where you're at today from a cash perspective for your business because there are items that go onto the balance sheet. So for example, when you're paying interest on a loan, if you're paying down the loan and paying the interest. You're going to be putting the loan pay down on the balance sheet and the interest on the P& L. But as a business owner, we don't really care that some of it's going to loan pay down because it's still cash flowing out of our business that month. So we want the whole comprehensive picture. And that's where this spreadsheet is so helpful because it puts that whole loan payment on there so you can see the true position of your cash. And I mean, I personally, get to the IRS isn't going to let me write off that loan pay down. And that's cool. I mean, I would love to be able to, but they're not going to let me because at the end of the day, that is reducing the balance that I owe. But from a business owner's perspective, that's still cash coming out of my bank account that I need to account for. And with being a real estate investor, we make heavy loan payments each month, and a lot of that is going to the loan pay down, and I want to make sure we're accounting for that. Also want to make sure when we're looking at our finances to see the profitability of a property that we're including that loan pay down as Profitability because it's not showing on the P and L. So I love using these forecasts and projections because it gives you a comprehensive view of the cash and the P and L perspective. So what's going to the IRS, you can see very clearly so that you know what you're paying them from a tax perspective, but then you can also see what it's doing in and out of your bank account. And I think that's so critical because at the end of the day, in the day to day operations of the business, it's what is flowing in and out of that bank account that matters more than what's going to the IRS. But your CPA is not looking at it that way because they care about what's going to the IRS, and that's their role, and that's their job, and that's great, but as the business owner, we need to have a slightly different perspective on it. Having these projections will help you reach your business goals, so you can align your daily action with those long term goals. And finally, it'll give you a competitive edge, so you can outmaneuver your competitors because you can see what's happening and forecasting and planning for the future in a more concrete way. So if you're ready to take control of your finances and build out your financial forecast, I have a template to help you get started. It's pretty basic and comprehensive to help you just take the first step. So you're going to plug in what you anticipate your revenue or income to be for the next 12 months. Then we're going to take out our cost of goods or cost of services, whatever it is, and then we'll take out other overhead expenses. And you can see what your total income, cost of goods, all your margins look like. And it helps you to take that historical data, but then put it into a futuristic view. So you'll use the historical data as the driving point to start it, but then you're going to tweak it for where you anticipate it will go in the future. So if you want this template, please check out the show notes and get the download of it there. And I'm curious What makes you excited or confused about these forecasts? And yeah, I just want to help any way I can. So send me an email or add a comment and I'd love to chat more about it. In our next episode, we're going to be talking about visualizing wealth and how you can use your mindset to reach that next level. That's all I have for you today. Small steps, big rewards. Remember your future self will thank you. Thanks for joining me on this episode of the Energetic CFO Podcast. Remember, small steps can lead to massive rewards. By taking action, staying disciplined, and seeking knowledge, you can achieve your financial dreams. If you enjoyed this episode, please be sure to share and subscribe. And don't forget to leave a comment with your thoughts and questions. Until next time, keep learning, keep growing, and keep thriving.