Budgeting Strategies for Small Business Owners
An effective budget is a vital part of success for any small business. A good budget gives you a snapshot of the financial health of your business, provides structure for day-to-day decisions, and helps you plan for the future. To ensure that your budget is as effective as it can be, consider implementing the following budgeting strategies for your small business.
Start With the Basics
Your budget should include all revenues, costs, and profits or cash flow for your business. In most cases you will divide your yearly budget into 12 months, leaving blank columns to fill in actual numbers throughout the year. This piece is important, as it will help you see how accurate your predictions were so you can adjust as needed. If this is your first time setting up a budget, you have a few options: you can set it up yourself using financial software or a spreadsheet; or ask your accountant to help you set one up.
Define Your Sales and Profit Goals
Start by estimating what profits you’d like to see this year. Be realistic. Look at your own financial statements and business trends, and research other local businesses and area trends as well. Don’t forget to consider factors like economic changes or loss of a major customer – anything that could affect your sales numbers. You might even consider creating multiple budgets to reflect different potential scenarios.
Overestimate Your Operating Expenses
Create an itemized list of fixed and variable expenses, including salaries and wages, rent and utilities, supplies, travel, raw material, taxes, etc. It might help to brainstorm with colleagues to make sure you cover everything. Even with careful planning, unexpected costs will arise for every business, so it’s a good idea to overestimate what you’ll need to spend in order to shield yourself from unexpected expenses or changes.
Understand and Plan for Risks
In a similar vein, consider your long- and short-term risks in order to plan a more accurate budget. Things like changes in the minimum wage or health insurance requirements, natural disasters (or worldwide pandemics like we are currently facing), reliance on seasonal workers, and more can all affect your business. Listing your guaranteed income and expenses per month will help you see what you have to work with and where your risks may lie.
Don’t make the mistake of thinking, “that will never happen” or “we’ll cross that bridge when we come to it”. If you plan for it and it doesn’t happen – great! But if your potential risks become reality you will be prepared.
Involve Your Team
You may want to consider including your employees in the budget-setting process. Your budget affects them, and their diverse skills and perspectives can help make sure you see all of the potential risks to your business so you can plan accordingly.
Consider Sales Cycles
Most businesses have sales cycles where they experience busy and slow periods over the course of the year. Make sure to consider this when budgeting, allocating more money to savings during the busy season so you have enough revenue to cover costs in the off-season. That way, during down time you can focus your efforts on upping your marketing and planning for the busy season rather than scrambling to make ends meet.
Don’t Forget to Pay Yourself
Especially when your business is new it can be tempting to save every penny you earn. And while it’s certainly important to save and to invest back into your business, your budget should allow room for you to be paid. After all, even as a business owner you are still an employee and you need to compensate yourself for your work. Going without a paycheck is not a sustainable way to grow your business.
Review and Revise Often
As your business grows and changes, your budget should follow suit. Regularly review your budget, making adjustments based on actual growth and profit patterns. It’s a good idea to take a look at your budget at least quarterly; many small businesses review their budgets as often as once a month. Doing so will give you a clearer picture of the financial health of your business.
Many financial problems small businesses face can be attributed to failing to monitor their budget in this way. Setting and sticking to your budget and reviewing it often will help your business stay on the right track.
Wood CPA is here to support you and your small business as you change and grow. Contact us today to see how we can help with small business bookkeeping, accounting services, and more!