Small businesses often fail for a variety of reasons. Many of those reasons ultimately stem from a lack of cash flow. Companies may run out of money due to poor sales or improper pricing.
Making a budget can help you avoid this fate. A budget helps you see how much money your company will have going forward. You can then spend your current funds based on this projection. Your budget may also reveal sources of excess money that you can then reinvest into the business.
Creating your budget does not have to be a complicated process, either. Here are some simple steps to get you started.
1. Calculate Your Revenue
First, you must determine how much money your business is bringing in each month. Consider all sources of income and add them all together. Ideally, your monthly income should be close to the revenue target in your sales plan.
If you have already been in business for multiple years, you can use your revenue calculations to examine seasonal patterns. Perhaps your company does well during the holidays but slumps during the summer. This knowledge should help you plan for any lean months in advance.
2. Determine Costs
Next, you should see how much money your company is spending each month. Start by analyzing your fixed costs. Fixed costs are recurring expenditures that are necessary for your business to function, such as salaries and rent.
Then you can examine variable costs, such as commissions and utilities. Variable costs change over time based on use. You may also want to include discretionary expenses, which are not essential but could improve your business. The cost of an accounting course that could help you learn to balance your budget is one example of a discretionary expense.
3. Consider Unplanned Expenses
Unfortunately, you cannot predict every business expenditure in advance. Every company must deal with an unplanned cost at some point. Maybe your company will suffer a security breach or a sudden equipment failure. You will have to spend additional money to deal with these emergencies.
You should thus put any extra income into a contingency fund. This way, when an unexpected expense arises, you will have the funds to pay for it. Without an emergency fund, a flood or fire could destroy your business.
4. Bring Everything Together
Once you have gathered all the necessary information, you can create your budget. Simply calculate your business’ income and subtract the various expenses. This will show you how much profit (if any) your business has made. You can then use this information to determine your budget.
Do not get stressed if your company has a negative profit margin. Many businesses take years before becoming profitable.
If you discover your business is in the red, there are things you can do to get closer to profitability. Look at your expenditures and see if there are any ways to cut costs. For instance, if your company relies on outside suppliers, see if you can negotiate cheaper prices for their products or services. This will save your business money and may improve your relationships with the suppliers.
You can also cut back on variable or discretionary expenses during slow months. Once your business’ revenue starts to increase again, you can resume these payments.
5. Analyze Trends
Your profit/loss calculations should demonstrate certain trends. Use this information when creating your budget. Perhaps your business spends more money in the spring and summer compared to the fall and winter. You should then set aside a larger budget early in the year and then make up the difference in the later months when expenditures are lower.
You do not need any fancy equipment or an expensive accountant to create a budget. You can determine how much money your business has just by analyzing the revenue and expenses. This budget should help you properly allocate your funds, which should increase the chances of your business succeeding.