As a small business owner, you know just how important it is to utilize your resources well and spend your revenue wisely. An effective budget can help ensure that you are investing in the right areas to keep your company moving forward.
To serve its purpose, your budget must allocate a set sum of money to each category of business operations. By keeping a close eye on every dollar that comes in and out of your business, you can hold yourself accountable to the budgetary limits you set.
With a single glance, you can see if you're meeting your forecasted expectations and identify factors of concern that may require immediate adjustments. In short, an effective budget is your key to financial and operational business planning over the long term.
Although the elements of any budget can be quite extensive and complex, the basic concepts of budgetary planning are relatively simple. With this in mind, let's start with the fundamentals of cash flow – or all the money that comes into and goes out of your business.
Calculate the Money That's Coming In
The first step in the creation of an effective small business budget is forecasting how much you plan to take in from sales on a monthly basis. The most reliable data to use for this estimation are your sales numbers from the previous year. However, even brand-new startups can project their approximate future sales by using industry and regional averages.
It’s important to also go beyond your sales revenue to include investment assets and all other sources of incoming capital. Place all these sources in a spreadsheet using reliable accounting software or, better yet, consider working with a qualified accounting professional.
Keep Tabs on the Money That's Going Out
Just as it is vital to take all incoming revenue streams into account, it is equally vital to know exactly where your money is going. Your outgoing expenses include both fixed costs (such as rent, insurance, payroll, and service charges such as internet connectivity) and variable costs (such as utilities, travel expenses, shipping costs, and professional development training).
Savvy business owners will also allocate budgetary funds for investments in strategic growth as well as a contingency fund for emergencies. Overestimating your expenses and preparing for the unexpected is essential – especially in this day and age. Consider involving your employees in the budgeting discussion. They can often help identify expenses that you may otherwise miss.
Look for Opportunities to Boost Revenue
With data at your fingertips for incoming and outgoing funds, you will have an accurate picture of your total cash flow. When your incoming funds exceed your outgoing funds, that’s called positive cash flow. Negative cash flow, on the other hand, occurs when your outgoing funds exceed your incoming funds. Wherever your cash flow stands, a quick look at your budget should provide a valuable snapshot at any point in time.
When you enter your expenses and revenue in a timely and precise manner, you are likely to spot opportunities to cut back on spending. Always be on the lookout for ways to boost revenue in the short term and over the long term.
Stay Aware of Your Sales Cycle
Every business is unique, and your sales cycle will depend entirely on the specific products and services you offer, your market share, and the industry you operate in. It’s important to chart your monthly sales and identify important patterns such as revenue and expense trends. This will allow you to build a budget that can take advantage of asset surpluses during your busy times – while protecting against overspending and overinvesting in slower times.
An airtight budget can help you feel more financially secure about the state of your business. By carefully tracking all revenue and expenses, a budget helps you make informed decisions that will maximize your profits, help you pay your bills on time, and most importantly – rest easier. Remember to revisit your budget often and make any necessary adjustments as needed to ensure you're continuing to meet the objectives of your business.
Wondering what the overall value of your business is? Use this calculator to determine the value of your business today based on discounted future cash flows with consideration of "excess compensation" paid to owners, level of risk, and possible adjustments for small size or lack of marketability. Visit our Simply Speaking blog for more articles on a variety of topics to help your business grow and be more successful.