Whether you are a startup or a seasoned company, small businesses rely on cash flow to stay in operation. Budgeting is the primary weapon a business owner has to control cash flow and predict possible shortfalls. If you want long-term success, you must maintain a budget and adjust your operations when budget tracking indicates the need to do so.
A budget that both estimates and matches expenses and revenues helps a small business forecast its cash position in the short and medium term. You need a cash forecast to ensure you can operate as planned, expand the business if the opportunity exists and verify that you can generate enough earnings to pay yourself a viable income.
What to Do
Don’t worry too much about how to do a budget. You can use an online spreadsheet, such as the IOU Financial Business Budget Smart Sheet, to make all the entries and generate reports. It’s more important to concentrate on what you must do to get the most from your budget. Here are five tips that you’ll find useful.
Check out industry standards: Every industry has its own characteristics regarding how much of your revenue you’ll have to allocate to various cost groupings. Retailing is quite different from refining, and you need to know the right numbers to use when constructing your budget. You can glean this kind of information from several sources, including the IRS website, the library, and other local business owners. You don’t have to be too precise, because small businesses tend to be volatile – what’s important here is to understand the industry averages.
Leave some slack: It’s great to budget, but it can be self-defeating if you aim for precision down to the nickel. Predictions are often unreliable and the future is uncertain. Bearing this in mind, it’s better to underestimate revenues and revenue growth relative to expenses when projecting the next three to 12 months. Better to have some extra cash on hand then to be caught short unexpectedly.
Sharpen your pencil: That’s old bookkeeper lingo for finding ways to cut costs. To do so, you’ll need to identify budgeted expenses that you can control. Fixed expenses like rent and insurance usually can’t be changed in the short run, but other items can, including non-critical maintenance, adjustments to labor usage, discretionary purchases and so forth. Remember to take advantage of your suppliers’ payment terms. In some cases, you might be able to reduce retirement plan contributions for the current year.
Review your budget frequently: Big businesses often work on an annual budget cycle. That makes sense, since their size requires a complex and time-consuming budget process. You, on the other hand, need to review your budget at least every month. A small business doesn’t have the kind of resources that the big ones use to smooth out surprises in the company’s cash flows. The more volatile your environment, the more frequently you will need to review and update your budget.
Comparison shop: It’s your responsibility to conserve your cash, and one of the best strategies is to shop around for new suppliers and service providers. There is never a bad time to do this, but the start of a new budget cycle is a natural point to comparison shop. It’s also important to do this when you are planning a change in operations.
In sum, budgeting is an essential part of running a business. A cash crunch can kill a small business, so stay ahead of the curve by tracking your budget closely and revising estimates as you gather new information. Finally, establish a relationship with a lender so that you can borrow money when you need it, whether budgeted or not.
