How to Plan for Small Business Success
You are a small business owner working hard to build a successful business. But one area you struggle with is budgeting. Learning the right way to budget for any business can be a scary process. Especially when finance and accounting are not your areas of strength.
A budget is critical to establishing and growing a business, regardless of how big or small your business may be. Surprisingly only 54% of small businesses have a budget. That could be one of the reasons for the high rate of small business closures.
As a small business owner, you have to know if you have the money to pay operating expenses. It’s also important to know if you have money to grow the business and pay yourself an income. If you don’t have a budget in place to compare where you stand today against what you expect in the future, you are taking a chance that you aren’t making the right financial choices for a successful business.
Don’t let the thought of budgeting scare you. Change your mindset to view budgeting as the roadmap to your success. A business budget is simply an outline of your finance details over a period of time. You can have a solid budget for your small business in four simple steps.
1 – Revenues
Revenues are the most important numbers for your budget. The revenues you expect to receive each month will determine how much you are able to pay out for bills and anticipated investments.
The ideal place to start estimating revenues is by reviewing your sales for the past year. Do you expect your sales to remain steady? Are you taking steps to increase your sales? Research trends in your industry to gauge what can be expected for the next several months and factor that into your numbers.
If you have a seasonal business, budget monthly revenues to reflect how you actually expect to perform during each month. Don’t assume you will receive the same amount of cash each month. Overestimating your sales could easily lead to overspending, leaving your bank balance too low.
Are you just starting your business? Research current trends in your industry for your geographical location. Visit similar businesses in your area and ask questions about their revenue expectations in the coming months.
Smart tip: Be conservative and estimate on the lower side of your revenue expectations. The less you expect to receive the more likely you will spend wisely.
2 – Fixed Monthly Payments
Fixed costs for a small business are payments you expect to have every month for a consistent monthly amount. These costs will include rent, some utilities, phone or internet plans, website costs, and payroll.
You can review your fixed costs by looking at your bank statements and income statements for the past year. These costs will be the minimum amount of payments you can expect to make each month.
While you review your prior fixed costs, look for costs that occur quarterly or annually. Those costs will be items such as income tax payments (quarterly) or property tax payments (annually or semi-annually). Budget those items in the months they will be paid and be aware you will need to keep money in the bank for these items as they become due.
As a new small business you will not have the historical costs to review. Estimate these costs based on any leases or contracts you have signed along with expected utilities. Your accountant or bookkeeper can assist with any payroll and tax estimates you should include.
Smart tip: Be conservative! Inflate your cost estimates to help make sure you don’t overspend. Any money not spent will help add a cushion to your bank balance for unexpected costs or saving for future investments.
3 – Variable Monthly Payments
Variable costs are not as easily estimated as fixed costs and can take longer to determine. Costs that will vary based on usage are some utility costs, such as electricity and gas. Other costs are directly related to the type of industry your business operates in and your expected sales volumes. These costs may include raw materials, shipping costs, sales commissions and travel related costs.
Model these costs to fluctuate monthly based on your sales expectations and product needs. There may be months when your business performance is less than anticipated and you are able to cut back on variable costs. On the flip side, you will have months when your business outperforms your expectations and you can spend a little more to help your business grow faster.
Keep a close watch on your monthly variable expenses and over time you will understand what can be expected as your business performance fluctuates.
Learn how to negotiate with vendors to get the best pricing possible for the products used in your business. Always try to have more than one vendor for your purchases. This will help safeguard against supply chain issues and cost increases.
Smart tip: Always be conservative and overestimate to help increase your bank balance!
4 – Consolidate All Information
Once you have all your cash inflows and outflows, put them together by month. The easiest way to handle this is with a spreadsheet. List all your income streams each month at the top and then deduct your monthly fixed and variable costs below.
The net number will reflect your expected earnings for each month. Once you see your monthly expected profits you will be able to make smart financial decisions. If you have some months with a negative balance, you will have to decrease your expenses or determine how to increase your revenues. When you see months that are expected to be profitable you can decide how to use those profits to help your business successfully grow.
Use your new budget to monitor your monthly income and expenses. At a minimum, you should be reviewing costs and revenues weekly to try and determine how well your business will do for the month. It may take some time to feel comfortable making estimates and reviewing costs regularly. Once you are in the habit, you will feel more confident and in control of the future of your business.
Smart tip: Update your budget regularly and maintain a twelve-month outlook for your business. Be flexible and make allowances for unforeseen situations that may arise. It’s always a good idea to hold on to extra cash.
Need Help with Your Small Business Budget?
Still unsure how to approach the budgeting process? Contact [email protected] today and we can determine the best approach for your budget needs together!