Clichés are around for a reason. Because they’re usually true.
Never is this more evident than the old adage that failing to plan is planning to fail. And that is precisely why your small business needs a budget.
A business budget is simply a plan for how your business will operate financially. Without it you can become completely lost, with no sense of how much money is coming in and how much you can spend. Without a budget, you’re destined to fail, so the argument for creating one is self-evident.
But you need a budget for reasons other than simply staying in business. Anyone you’d borrow money from, like a bank or business financing firm, will want to see that you have plans to make money. Employees might find it useful to see a budget, so they know the direction the business is going and what kinds of requests they can make. And a budget will give you an idea of your capacity to expand, showing how much money you’ll have available for things like marketing and new equipment.
Tips to Create a Business Budget
Ideally, you developed a budget when you made your business plan. But if for some reason that fell by the wayside, or your dog ate it, here’s a simple primer:
First, start by calculating your total expenses, both fixed and variable. Fixed expenses are things that are constant, unchanging costs, like rent, salaries, office supplies, insurance, depreciation, auto payments, phone/internet and utilities. Variable costs would be things that vary depending on production, like costs of goods sold, travel, commissions, energy, marketing, and other operating costs. Always err on the expensive here, because you’ll probably still exceed that.
Then figure out your expected revenues for the year. The best way to do this is to look at revenues from the previous year, but if you’re just starting out you’ll have to do some homework. Study competing businesses in your industry to see what kind of revenue they bring in. Look at industry-wide data and figure out what your company can expect. And think about how much you’ll need to charge for your product or service to get your expenses covered, as well as how many units you can expect to sell.
Once you’ve got those numbers, subtract expenses from revenues and you’ve got … profit margins! This is why you’re in business, right? And when you’re looking for investors, or even people to loan you money, this is the literal “bottom line” they’re going to want to see.
Evaluate and Adjust
For your budget to be effective you’ll need to update it throughout the year. At a bare minimum you’ll need to update it quarterly, but monthly updates are going to prove the most effective.
Your initial budget is full of projected figures. At the end of each month add a column next to that for actual figures, and see what the differences are. Are there areas where expenses have grossly exceeded expectations? Scrutinize those areas and see why that happened. Did sales not live up to expectations? Why? Answer all of those questions, and see if you can come up with solutions to address each deficiency.
But beyond that, you’ll need to adjust the budget to account for the difference in figures. If sales aren’t what you’d expected, cut every cost you can. If expenses are astronomical, cut those and focus your energy on increasing sales. Making these changes every month won’t ensure you’re profitable, but it will at least let you change course quickly.
Get Your Team Onboard
Getting your employees motivated about your budget will do more for your projections than anything else. A great way to achieve that is to tie incentives to budgetary performance. So if your sales force meets revenue goals, their bonuses kick in. Or when your administrative and support staff keeps costs where they need to be, they’re rewarded as well. Of course, you’ll need to budget for those bonuses too.
There’s Another Budget You’ll Need
What we’ve described above is known as an operating budget, and is absolutely necessary to run a small business. But to make sure you have enough money to turn the lights on, you’ll also need what’s known as a cash flow budget. So what’s the difference?
An operating budget doesn’t necessarily account for lag time in payment, so even if you had $10,000 in revenue for January, you might not see that $10,000 until April. And since you have bills to pay in the meantime, you’ll need to budget to ensure there’s always cash on hand to pay them.
A cash flow budget looks at actual dollars in and dollars out each month. So when developing this first look at how much actual money you’re spending each month (things like depreciation won’t be factored in) then subtract the dollars you expect to receive.
If there’s a shortfall there—which there often will—BFS Capital can always help you out. A short-term business loan to improve cash flow is the easiest solution until your accounts receivable catch up. This type of loan also allows you to stay within your budgets—both operating and cash flow—so your business can thrive for another year.