If you don’t plan, you plan to fail. Nowhere is this truer than in small business budgeting. You need to know exactly where you stand in terms of the expense budgets you need to adhere to and the income budgets you need to reach in order for your business to be profitable. You also need to know that you’ll have sufficient cash flow, even in difficult months and once again, budgeting helps you to plan effectively.
Ideally, you need more than just a plan for the financial year. Month to month budgeting helps you to ensure that your business is on track and enables you to take timely action when things aren’t going according to plan.
There are several approaches to budgeting:
Budgeting Using Historic Data
If your budget has been operating for a year, or better yet, a few years, it’s easy to draw historical data and look for patterns. Most businesses have busy and quiet times. During the run-up to the ‘busy’ season, materials expenses can be high resulting in a potential cash flow crunch. Looking at historical data helps you to determine what you can expect from each month and allows you to plan ahead.
Budgeting Using Projections Only
New businesses can’t rely on historical data, so realistic income and expense projections are absolutely necessary to success. If possible, try and get some idea of what you can expect by looking at similar businesses in your area that are for sale. Even if you aren’t serious about buying an existing business, their figures will give you some indication of what you can expect.
When you’re starting from scratch with business budgeting, you will have to allow for a greater margin of safety. That way, if one or two months don’t go as planned, you still stand a chance of breaking even or even making a small profit. Keep your new business as lean as possible. Remember, the more costs you can cut without hurting your chance of success, the better your chances of making a profit during your crucial first year.
Your fixed costs are usually fairly constant throughout the year. What will you need to keep your doors open? Elements such as commercial property rental, wages and insurance need to be considered first. If you haven’t done this before, consider getting an accountant to act as a business consultant for your budgeting process.
Consider outsourcing certain tasks so that you can get away with less staff and investigate the possibility of using contract workers during busy seasons rather than carrying a large staff all year round. The lower your fixed costs, the greater your chances of making a profit.
Variable Costs and One-Off Purchases
If you’re an established business, variable costs can be timed to match periods when your cash flow is likely to be stronger. Businesses with a quiet period in which production inputs are high and sales are low during one period and where the opposite is true in the ‘selling season’ are the exception. New businesses usually need quite a large of variable cost spend and one-off purchases just to get started. Think about the times you’ll need to purchase stock, equipment or vehicles and factor it into your budget or plan. Investigate suppliers and see what kind of deal you may be able to get when you will have to make payments and so on.
See If the Plan Can Work
Now that you’ve got a fair idea of what kind of income you can expect your business to generate and what your monthly costs will be, you can create a cash-flow projection that allows you to see whether your income will cover your expenses even in months you expect to be quieter. Remember, you also want to make a profit at the end of the year!
Using excel spreadsheets, you can quickly develop a picture of what to expect. Will your cash flow shortage in certain months jeopardize an otherwise successful financial year? As long as you can find a source of finance to pull you through those months, it might not be a train smash. Knowing that your business will need an injection of cash ahead of time allows you to plan accordingly and pull through those difficult months while keeping your stress levels relatively low. After all, it’s all part of the plan!
Monitor Your Results
New businesses need to be particularly careful in monitoring results to see if everything is on track. Many small businesses fall behind with their admin, particularly the capturing of business expense invoices.
If you’d like to cut on accounting fees, there are several online platforms that can help you to stay up to date with expenses by capturing and storing your invoices for you. Ideally, you should do a full analysis of where you stand in terms of income and expenses every month and for the year to date. Try and determine the reasons for variations. If things are looking out of whack, you may have to adjust your budgets accordingly.
For example, if your income is consistently higher and your costs lower than expected, you may decide to put extra capital into your business. On the other hand, if your business is not as profitable as you had hoped, you may need to revise your expenditure budgets to allow for the reduced cash flow.
In most cases, a single month that didn’t go quite as planned is insufficient reason to re-budget, after all, you could make up the difference in the following month or two. Use your instincts and look at percentages rather than absolute values. A 2 percent variance isn’t much, but it might look like a lot of money if you only consider absolute values.
The Bottom Line
Although crunching all the numbers might seem like an onerous task when you’re raring to go, it’s the best way of evaluating your chances of success with a new business and gauging your situation in the coming financial year for an established business. Planning ahead for lean times by ensuring that you have a source of additional finance can help you to stay afloat while those around you crumble. It’s all about being prepared, knowing what to expect and sticking to the plan.
Contact Seek Capital today if you are a new business and are looking for a startup business loan.
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