A healthy bank balance doesn’t always mean a business is in good shape, according to some CPAs: Unanticipated expenses or even seasonal spending for inventory and other needs can throw an unsuspecting business owner for a loop. Instead of relying on the bank account, a company can stay prepared for a sale by setting up a budget or cash-flow projection.
“Smaller business owners may understand the concept and purpose” of a budget, said Chris Rosmarin, a Livingston-based director in the audit and financial advisory practice of CPA firm Crowe Horwath LLP. “But they tend to create budgets that fit the needs of the person who’s requesting it.”
So they may have an internal budget, another budget they give to lenders and yet another for auditors, Rosmarin said.
“Then you get all these mixed messages and it’s harder to manage the business,” he said. “It’s better to be reasonable, and make sure the budgets align.”
A budget or cash flow projection is only as good as the underlying assumptions, he added.
Basing near-term revenue and expense assumptions on recent activity is a good start, he said, noting that on a going-forward basis the budget should be compared to actual results, and significant differences should be analyzed and documented.
Besides being an effective internal control, it’s a “good way to figure out whether your strategic plan is operating successfully,” Rosmarin said.
Accurate budgets and projections are even more important “in a choppy economy, when accounts receivable may not come in as expected,” said David S. Untracht, a senior principal and co-founder of the Florham Park CPA firm Untracht Early LLC.
He advised paying attention to issues like seasonality, the time it historically takes to actually get paid, and “the period of time between undertaking a project and when you can bill for it,” since a business owner may have to lay out cash to cover upfront costs.
“Newer businesspeople without experience tend to underestimate the need for cash-flow planning,” he said, but they soon get better at it, since “after a while, you get a sense of what’s normal and when things will happen.”
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