How to Budget as a Small Business
August 24, 2022 (Investorideas.com Newswire) If you've decided to open or purchase a business, then you are probably pretty good at whatever that business does. However, it's one thing to be able to cook well, or create fun designs, or cut hair, as just a few examples, and quite another to be successful as a business. The fact of the matter is that many businesses fail early on in the game. There are several reasons for that, but the biggest is that they haven't managed their money properly.
Running out of cash to pay bills and employees will get a business in deep trouble very quickly, and you'll have to do everything you can to avoid such a fate. While it might seem simple, too many wannabe entrepreneurs do not take the time to create a realistic budget. In many cases, it's simply because while they are good at their craft, they haven't been taught the art of budgeting. Here's a guide to help you get your small business finances in order.
Start With Your Revenue
The first step you need to take is to tabulate all of your possible revenue from all of your possible revenue sources. This can be from sales, from consulting fees, from renting out your space, or anything else that brings in money. If you've been in business for a while already, use a monthly average. If you are just starting out, then you will need to do some research to get a handle on what is realistic. Do not overestimate your revenue to try and be optimistic. It's always better to bring in more than expected than to bring in less than you've planned.
List Your Fixed Costs
The next step is to list out your monthly or regular fixed costs. These are the costs that you cannot avoid, and come in on a scheduled basis. They also tend to be costs that are roughly the same every month. They include things like your utility bills, rent or mortgage, software costs, payroll, insurance, and website hosting fees. Be comprehensive and make sure that everything is listed. If you haven't started up yet, then make sure that all of these costs are included. The last thing you want is to budget and then to realize you've forgotten an important cost.
Variable costs may also come in on a regular or scheduled basis, but the amounts may change from payment to payment. This fluctuation can happen for any number of reasons. These types of costs include materials, shipping costs, marketing, and some utilities. As you add up your variable costs, you may find that there are some things you can cut out for certain months when things are tight. Like your fixed costs, make sure that you include everything here so that you don't find yourself short.
Have Some Contingencies
Small business budgeting means being prepared for both the expected and the unexpected. Where many entrepreneurs get in trouble is that they run very tight margins and are sunk when something unexpected comes up. For example, businesses need to make investments at important times to grow. You may also have to buy equipment or make repairs. If you aren't prepared for these one-time or irregular spends, then you will be in trouble.
Make sure that you build in a contingency amount in your budget to account for these types of costs. If you aren't able to do that when you first start out, make sure that any funding you seek for your business includes that wiggle room. You do not want to find yourself struggling right off the bat because something broke or you wanted to invest in an opportunity.
Examine Your Profit Margin
Your profit margin is the amount of your expenses subtracted from your profits. If that number is positive, then you are bringing in a profit. If it's negative, then your expenses outweigh your revenues. This is common with new businesses, so do not give up if you see this your first time. If you have a large surplus, then you can think of ways to invest back into your business to help it grow.
See Where You Can Cut Costs
When you have it all laid out, it's easier to see where you can cut and what you have to keep. This is especially important if you are running at a loss. Take a look at all your expenses, and remove those that aren't necessary. This may change on a monthly basis depending on your situation. You can also help with your cash flow by being strategic about when to pay your invoices within the billing periods offered by suppliers and vendors. Being able to cut costs or be creative when you pay for things could make the difference when it comes to being able to market a new product or invest in a new piece of equipment that will help you grow.
Review Your Budget Often
Even as a small business, you should have long-term plans. That means not just budgeting for 12 months, but also for up to 5 years. However, while you need to plan ahead, you should also be checking and reviewing your budget on a regular basis. A lot can happen in a year's time, and you will want to account for any fluctuations that you identify. If you are spending less for one cost, maybe you could shift some investment to another, for example. You should also be searching on a regular basis for cheaper alternatives, such as for your insurance or utilities. Any cuts you can take advantage of will help you in the long run.
Don't be one of the businesses that gets sunk because you couldn't manage your money. Make a detailed and realistic budget using these tips so that you can grow responsibly and make changes if your finances call for it.
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