Setting a budget can be quite challenging for small businesses. Often, a lack of experience and relevant resources can lead to costly mistakes. Even companies that operate in the same industry can have vastly different budgeting needs. Therefore, as a small business owner, you cannot adopt a single approach for budgeting and go along with it. Fortunately, there are certain methods that you can use for efficient budgeting. In this article, we will share with you professional budgeting tips for small business owners.
Creating a Small Business Budget
Contrary to common belief, budgeting for a small business is not an easy job. Even if you have been running the same company for a decade, creating a budget requires advanced problem-solving skills and creativity. Especially now, we live in a very uncertain world. Hence, we need to be prepared for all sorts of scenarios. This applies to creating a budget for a small company.
A budget is a plan which dictates how and where to spend money monthly, quarterly, or annually. The budget must contain expected revenue and fixed and variable costs. Keep in mind that you may not be able to follow your planned budget thoroughly. However, you should make sure that you are not overspending. This can be the biggest threat to a small business that does not have unlimited access to finances.
Moreover, you should track your budget very carefully. Even if you change your financial plans, you should record everything. This does not mean mandatory accounting but the managerial approach to recording a company’s financial performance. At the end of the day, every penny counts, and your budget should ensure that every penny is used for a purpose.
Set Clear Goals
Successful budgeting means setting the correct expectations from the very beginning. Assess your company now and decide where you want it to be in the future. Naturally, you have to design the budget according to the goals.
When you determine what is your target profit growth rate, you will be able to discover the weak spots in the budget. Additionally, setting the right expectations will enable you to direct resources to your goals.
Include Unexpected Expenses
Unexpected expenses can become very problematic for a small business. Therefore, it should always be included in the budget. One major issue with expenses is that often it is miscalculated. However, an even bigger issue is when we are unable to foresee certain expenses. This is why you should always have extra cash to cover unforeseen costs. The most common types of unexpected expenses include:
- Equipment maintenance and upgrade
- Increased cost of supplies
- Inventory loss and damages
Additionally, do not forget about delayed payments. When you forecast the cashflows always keep in mind the possibility of postponed receivables.
Even businesses without clearly visible seasonality have certain sales patterns throughout the year. It is very important to consider this factor when you are working on budgeting. If your small business experiences “slow periods” during the year, you need to plan cash movements accordingly. It is crucial to oversee this with the budget.
The biggest cost small businesses usually have is Cost of Goods Sold (COGS) and decreasing it can have a positive impact on your profit. Once a year check your suppliers and prices they offer you. Do not hesitate to negotiate the conditions.
It is extremely easy to miss the decrease in prices on the market if you have long-lasting suppliers. A lot of businesses are overcharged because they do not check market prices regularly. So, do not make this mistake and review your purchasing terms regularly.
Revenue ≠ Cash
Revenues do not necessarily mean that you have cash in the company. Furthermore, you need cash to finance your day-to-day operations. Therefore, understanding when you get cash and planning the budget accordingly is one of the most crucial budgeting principles you must understand.
Plan purchases according to the cash flow and always have some extra cash for unexpected expenses.
This may sound controversial however, it is one of the most useful things you could do. When budgeting, we aim for precision. Unfortunately, it is simply impossible to forecast everything exactly. Therefore, we should always leave space for some errors. This way certain unexpected issues will have less impact on your business. Overestimating expenses is a safe bet, and it will not leave you unhappy. When you forecast the expenses, add a certain percentage of it to the final amount. With this method, your budget can cover unforeseen increases and miscalculations.
Update Budget Regularly
Last, but certainly, not least is updating the budget. Obviously, you should create a new budget for every new year. However, a budget is a living document it changes and develops all the time. Hence, you need to keep it up to date. Overview your annual budget on a quarterly basis or twice a year and edit if necessary.
Moreover, if you are running a new company, you will need to check the budget more frequently. Budgeting needs and opportunities change for a new company very often and you should modify the whole document accordingly.
Budgeting is not as scary as it may seem. It can be quite easy if you understand your business with its revenues and expenses. If you want to create a budget successfully, question your decisions and check the final document several times. Make sure you are not missing important expenses. Additionally, review and update the budget throughout the year. Remember that budget can be modified and updated. As long as you are not using this opportunity to justify bad decision-making, it can be a powerful tool to improve the performance of your company.