You've just purchased or opened a small business and you know your trade, but when it comes to bookkeeping and, more specifically, budgeting, your skill set is lacking. It's OK - the good news is that it is possible to come up with a budget, or at least a good estimation of what will be needed in terms of dollars and cents. Read on for six simple tips that will help you put together a top-notch small business budget.(To read about large corporations' budgets, check out How Budgeting Works For Companies.)
Why Budgeting Is Important
Estimating and matching expenses to revenue (real or anticipated) is important because it helps small business owners to determine whether they have enough money to fund operations, expand the business and generate income for themselves. Without a budget or a plan, a business runs the risk of spending more money than it is taking in or, conversely, not spending enough money to grow the business and compete. (If you haven't set up your own personal budget yet, read The Beauty Of Budgeting and our Budgeting 101 special feature.)
Every business owner tends to have a slightly different process, situation, or way of budgeting. However, there are some parameters found in nearly every budget that you can easily employ. For example, many business owners must make rent or mortgage payments. They also have utility bills, payroll expenses, cost of goods sold expenses (raw materials), interest and tax payments. The point is that every business owner should consider these items and any other costs specifically associated with his or her business when setting up shop or when taking over an existing business. (For related reading on owning a business, see Why Owners Sell A Business and Is Buying A Franchise Wise?)
What To Do with Revenue
With a business that is already up and running, you can make assumptions of future revenue based on recent trends in the business. If the business is a startup, you'll have to make assumptions based on your geographic area, hours of operation and by researching other local businesses. Small business owners can often get a sense of what to expect by visiting other local businesses that are for sale and asking questions about weekly revenue and traffic patterns.
After you've researched this information, you should then match the business's revenue with expenses. The goal is to figure out what an average weekly expense for overhead, utilities, labor, raw materials, etc. would look like. Based on this information, business owners may then be able to estimate or forecast whether they'll have enough extra money to expand their business, or to tuck away some money into savings. On the flip side, owners may realize that in order to have three employees instead of two, the business will have to generate more in revenue each week.
Let's look at six tips that will help you plan your small business budgets.
Tip No.1: Check Industry Standards
Not all businesses are alike, but there are similarities. Therefore, do some homework and peruse the local library for information about the industry, speak with local business owners, and check the IRS website to get an idea of what percentage of the revenue coming in will likely be allocated toward cost groupings.
Small businesses can be extremely volatile as they can be more susceptible to industry downturns than larger, more diversified competitors, so you only need to look for an average here, not specifics.
Tip No.2: Make a Spreadsheet
Prior to buying or opening a business, construct a spreadsheet to estimate what total dollar amount and percentage of your revenue will need to be allocated toward raw materials and other costs. It's a good idea to contact any suppliers you'd have to work with before you continue on. Do the same thing for rent, taxes, insurance(s), etc.
Tip No.3: Factor In Some Slack
Remember that although you may estimate that the business will generate a certain rate of revenue growth going forward or that certain expenses will be fixed or can be controlled, these are estimates and not set in stone. Because of this, it's wise to factor in some slack and make sure that you have more than enough money socked away or coming in before expanding the business or taking on new employees.
Tip No.4: Look To Cut Costs
If times are tight and money must be found somewhere in order to pay a crucial bill, advertise, or otherwise capitalize on an opportunity, consider cost cutting. Specifically, take a look at items that can be controlled to a large degree. Another tip is to wait to make purchases until the start of a new billing cycle, or to take full advantage of payment terms offered by suppliers and any creditors. Some thoughtful maneuvering here could provide the business owner with much needed breathing and expansion room. (To get venture capitalists to invest much-need capital into your company, see Fly High With Angel Investors.)
Tip No.5: Review the Business Periodically
While many firms draft a budget yearly, small business owners should do so more often. In fact, many small business owners find themselves planning just a month or two ahead because business can be quite volatile and unexpected expenses can throw off revenue assumptions.
Tip No.6: Shop Around for Services/Suppliers
Don't be afraid to shop around for new suppliers or to save money on other services being performed for your business. This can and should be done at various stages, including when purchasing or starting up a business, when setting annual or monthly budgets, and during periodic business reviews.
Budgeting is an easy but essential process that business owners use to forecast (and then match) current and future revenue to expenses. The goal is to make sure that enough money is available to keep the business up and running, to grow the business, to compete, and to ensure a solid emergency fund.
InvestingFreelancers are not covered under the Family and Medical Leave Act, but maternity leave is still doable with these tips.
Personal FinanceHere are the simple financial Ten Commandments that, when faithfully followed, can lead to a secure economic future.
ProfessionalsLearn more about what project managers job, the qualifications necessary for the position and the most common careers for these professionals.
EntrepreneurshipLearn how a complete risk management plan can minimize or eliminate your financial exposure through insurance and prevention solutions.
Personal FinanceEven if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances.
EntrepreneurshipWhether or not you are a fan of human resources, every employer needs to know the answers to these questions.
EntrepreneurshipThere are a lot of risks associated with running a business, but there are an equal number of ways to prepare for and manage them.
EntrepreneurshipLearn about some of the most successful crowdfunding campaigns on Indiegogo, which raised millions of dollars for everything from electric bikes to beehives.
EntrepreneurshipLearn about how the Marketplace Fairness Act may impact small business owners should it pass in the House and what the act requires from business owners.
EntrepreneurshipMost family businesses do not survive in successive generations, but these steps can help ensure that yours will.
A small business must continuously monitor its cash budget to ensure adequate and consistent funding of daily operations. ... Read Full Answer >>
While working capital funds do not expire, the working capital figure does change over time. This is because it is calculated ... Read Full Answer >>
In recent years, state governments have become increasingly aggressive in enforcing escheatment laws. As a result, many businesses ... Read Full Answer >>
Hedge funds normally do not invest in private companies because of liquidity concerns. Capital funding for private companies ... Read Full Answer >>
The amount of working capital a small business needs to run smoothly depends largely on the type of business, its operating ... Read Full Answer >>
When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>