When you set out to become a business owner, I highly doubt you ever thought you’d consider giving up; yet, every day small businesses fail. While I can’t prove this, my personal opinion about why so many businesses collapse has a lot to do with the lack of a certain “B” word I’ve talked about repeatedly here at Financially Simple—budget. Yes, you read that right. I believe one of the greatest failures new small business owners make is failing to build a business budget.
Whether they have or have not mastered budgeting in their personal life, far too many business owners are not tracking their company’s expenses. However, if you genuinely want to make your business a success, you need a budget to keep your finances in check.
I recently met with a friend of mine who began telling me how his business was failing, and he was considering getting a “real job”. My first question was, “Are you budgeting in your business?” The answer was a resounding, “No.” Again and again, I see this situation.
As a small business owner myself, I know business isn’t always booming. Financial fluctuation happens, and if you are not prepared for those moments, you could end up in mess, settling for less than your hopes and dreams.
I don’t want to see that happen to you. That’s why today, I’m giving you five (Financially Simple) tips to help you build a business budget for your new startup.
Knowing where your money comes from is essential. Trust me. I understand there will be times when invoices will go unpaid. However, you must have an idea of exactly how much you are bringing in on a monthly basis. Build a Profit & Loss (P&L) statement and look at your sales often. It doesn’t have to be extremely complicated like a larger company. You can use an app on your phone like Freshbooks. I even have some clients go as far as categorizing their various income sources. When you have numbers for six months, determine your company’s average monthly income. No matter how much deviation there is in numbers, YOU CAN FIND AN AVERAGE and start there.
Every business, and home, for that matter, has a certain set of predictable expenses. These expenses will come due monthly whether your business brings in any money or not. Perhaps you rent or lease a building. You likely pay an insurance premium monthly, quarterly, or annually. Your payroll expenses quite possibly fall into this category (and don’t forget the potential overtime pay for your employees). The point is, know these numbers. This will be the easiest task when creating your budget.
Next, begin to calculate variable expenses. Those are typically tied to the production output of your company. This could be merchant services fees if you take credit cards as a form of payment. You know you will incur the charges; however, you don’t always know the amount. By overestimating variable expenses, you allow yourself some wiggle room during your lean times, thereby keeping your budget on track.
Pay attention to the cycle of your company’s revenue. For example, my first business was a landscaping business. During the spring and fall, our nursery division sold the majority of the year’s plants. The other months had sales, just not on the same scale.
My current business is extremely busy from February to April. With it being the first of the year, people are planning for the upcoming year while wrapping up last year’s fiscal responsibilities. Obviously, we work with clients year-round, but those first few months are our most hectic time of the year. Knowing my sales cycle, I can almost always see my revenue peak in those months, and I leave extra in the bank to cover the leaner months’ expenses.
Your business has cycles too. Pay attention to when they are so you can be better prepared. Utilize those down times to plan for the next upcycle. Perhaps you pour more time and energy into your marketing efforts in order to boost your upcoming slower sales cycle. Anticipating these slower times can also help you work to keep your costs lower in those months.
Knowing when your cash flow will be at its highest can also help you save for large purchases you need to make. I have a client that works with heavy machinery. The average purchase for him is $600,000 to $800,000 for just one piece of equipment! If he did not build into his budget a way to strategically save for a period of years he’d never be able to afford to upgrade or replace his equipment. Carefully plotting out a savings plan for these future expenses could lessen your financial burden later. Whatever the amount is, start your preparation with a category for it now in your budget.
Arthur Schopenhauer once said, “Ordinary people think merely of spending time, great people think of using it.” It’s an excellent lesson when it comes to business budgeting. Time matters in every area of your life. For example, if you underestimate the time spent on a project, you can accrue extra expenses in the form of materials, people, etc. Whenever you create a budget, make room for time—time for the project, time for the payment—time! You will miss some deadlines! However, if you have budgeted, these overages won’t hurt nearly as bad. It is essential to factor time into the equation of budgeting for a business.
Budgets change and when they do, you need to make adjustments. Create two budgets for your business. One is an annual budget. Project out your entire year of expenses. Then, plan how each of those expenses should be allocated monthly. Once you have your budget in place, look over it monthly to keep on track.
It is essential to plan a major budget overhaul for your business at least twice a year—when your fiscal year begins and halfway through it. That way if you need to revamp or cut things in the second half of the year, you can. Doing this will ensure that you don’t get drastically off track.
The idea behind a business budget is to have revenue coming in to support your business all year long so that you never need to give up on your hopes and dreams and get a “real job” like my friend was considering doing. Make sure you are meeting your immediate needs as well as working on the long-term growth of your new business. If you need help creating a budget, let’s get together and build one. We’d be happy to get your business on a Financially Simple path.
RELATED ARTICLE: Performing a Personal Financial Assessment for Startup Owners
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