5 things your new small business needs to know on a budget
A good budget is one of the fundamentals of a business. But budgeting for a business is very different from budgeting for yourself. Twenty percent of businesses fail during the first year, and one of the most important factors is funding.
You need to understand how to budget a business to keep your small business afloat.
A budget itself is pretty straightforward – it’s just your income and expenses measured over a certain period of time. You can use this information to plan your spending. But for new entrepreneurs, there is a key mindset shift to conquer.
Running your own business is different from working for someone else’s business. Paychecks are generally stable, but you go through good times and sluggish times with a business and you need to manage your cash flow accordingly.
The first task of a budget is figuring out where all your money is coming from and roughly how much you will earn. Then you can move on to your next steps.
Understand your fixed and variable costs
The first thing you need to figure out is how much you are going to spend. If you’re budgeting monthly (probably, since most bills will come month-to-month), you need to figure out which costs are fixed and which are variable.
The fixed costs are the same every month – they don’t change much, and they don’t tend to change without warning. These are things like website hosting, phone bills, rent, and payroll.
Variable costs are different from month to month and can rise or fall unexpectedly. They usually vary depending on the volume of business you are doing. A variable cost would be something like gasoline for a lawn mowing business, shipping and handling for a dropshipper, or food for a restaurant.
Determine which are fixed and which are variable and compare them to your income. Find a way to make your total fixed costs and average variable costs less than your income, and you will be in business.
Set aside money for planned and unanticipated costs
There will always be something unexpected. Maybe one of your fleet vehicles blows up an engine and you have to buy a new one or something like that. Either way, you want to have cash on hand to meet expenses so that you don’t have to rely on loans. Include this in your monthly budget.
You may also be able to anticipate some of these costs. For example, if you operate a fleet of vehicles, you should be put money aside for their possible replacements.
Plan what you can and save for it. Leave some wiggle room in your budget above your fixed and variable costs so you can put money back. This will save you headaches in the long run.
Don’t confuse cash on hand with billing
You probably already use accounting software, but budgeting isn’t just about consistent bookkeeping. An overview of your accounting functions will allow you to find hot spots before they become a problem. It will also help you differentiate the money people owe you from the money people have already paid you, which is the key to staying on top of your cash flow.
A solution like vcita can give you an overview of accounts receivable, showing which customers are regularly late or inconsistent with their payments. This allows you to make more informed decisions and deal with problem customers. And if you can do that, your monthly financial situation will start to look a lot brighter.
If your business is in the service industry, chasing after unpaid invoices can waste your time and guess how much cash you can count on for your operating budget. Using automated reminders and processing payments online can make all the difference here.
You probably won’t make a profit every month
You need an annual budget to work, but you need to realize from the start that your monthly profits aren’t going to seem stable. Every business has peaks and troughs that are often dictated by forces beyond their control, and some months you could dive to the point where your expenses outweigh your profits.
These are the times when you might need a short term loan to help you out if you don’t have operating cash set aside.
Don’t be surprised when this happens. Set that money aside for a rainy day so you can tap into it.
Create monthly income projections
Cash flow is essential when you are run a small business. There is no point in telling someone that you will have a big job in 60 days when you have to pay for it in 30 days.
A monthly income projection can help. Take stock of your sales, product margins, the state of the economy and your industry. When you are just starting out, it can be difficult to make an effective forecast because you don’t have a lot of data. You’ll need to rely heavily on industry research rather than internal numbers until you’ve got a few months under your belt.
Make sure to update on a monthly basis. Don’t just settle for the same old projection… the landscape of your industry will change. You can launch a new product that should boost sales or open a new marketing channel. Forewarned is forewarned, and that’s one of the keys to staying ahead of the game.
Accounting is not a sexy part of business, but it is an important part. Building an effective budget is essential to your success. Keep these five points in mind throughout the process and avoid the pitfalls of budgeting a business.