Small business budgeting doesn’t have to be a headache. We don’t recommend it, but businesses operate without following a budget or other financial plans more than you think. You might even be running one of those businesses (although we hope that’s not the case).
However, there are many free resources for entrepreneurs who are ready to learn the ropes of business finance. (If you don’t already have a budget in place, here’s a business budget template from Quickbooks to get you started.) The fact is, for your business to be a success, you need to have a handle on its finances.
Most of us know at least some budgeting basics, like calculating revenue versus expenses in order to determine profit. But there are other things small business owners should consider when planning their budgets.
Here are just a few helpful tips to make small business budgeting work a little better for you:
1. Overestimate expenses, underestimate revenue
As we mentioned, most business owners know to keep track of their expenses and revenues. But it’s actually a good idea to overestimate your expenses and underestimate your revenue.
Doing so will help you build a bit of a cushion in case your actual numbers don’t perfectly align with what you had planned in your budget (hint: they rarely do). This practice also provides some flexibility. Maintaining and sticking to a budget that’s too rigid can be detrimental, too. Essentially, there’s a balance you need to strike.
If you’re not sure just how much to overestimate or underestimate, it’s a good idea to consult an accounting professional to help you figure it out.
2. Be sure to account for seasonal variations in revenue
Although this doesn’t apply to every type of business, if your company is situated in an industry that tends to slow down during certain times of the year, it’s important to account for that variation in your budget.
Some industries that tend to have drastic ebbs and flows include lawn care, recreation, construction, or holiday-oriented businesses. Even professional photographers usually see slower seasons followed by big-boom times, such as wedding season in the summer months.
If you run a business with seasonal variation in revenue, you must have a very disciplined management of cash flow, among other things. It’s also a good idea to plan an entire year’s budget in addition to maintaining your monthly budgets. You’ll really need to plan for the long haul in these cases.
3. Expect the unexpected
Like anything in life, business can be unpredictable. Actually, scratch that. Business is unpredictable – period. As essential as it is to plan your budget, you should never assume your projected numbers will be absolutely accurate at the end of each month.
Just as you should be doing with your personal finances, it’s important to set aside cash each month to plan for the unexpected. You simply never know when a company vehicle will go kaput, your desktop computer will crash for good, or your building will need a major utility repair. These are all crucial “what-ifs” to keep in mind.
Paramount to maintaining a financial cushion is a simple guideline: never, ever spend all of your month’s profits. Doing so will land you in risky territory that may require you to take out small loans.
If you need help determining the best way to set aside rainy-day funds for your business, we will help you figure it out.
4. Plan for large purchases early
While it’s good practice to set money aside for unexpected expenses, it’s a no-brainer to plan for larger purchases you can actually foresee.
For example, it’s likely that when an unexpected surplus of revenue becomes available, you will find yourself in a position to invest in the growth of your company. When you experience enough growth, you may be ready to purchase more equipment, supplies, or even expand your workforce. You don’t want to find yourself unable to make an important purchase because you didn’t plan proactively.
If you foresee a large purchase or an expansion of your company within the next year or so, you need to begin financially preparing for it now.
5. Watch cash flow like a hawk
We have to admit – managing cash flow is easier said than done. But here’s the thing: when it comes to cash flow, you have to know your numbers to keep your head (and your business) above water.
This is perhaps even more important if your business is brand new. According to QuickBooks, businesses that do not effectively manage cash flow in their first year often don’t make it to their second year.
Basic practices for managing cash flow include keeping track of how much money clients owe you, how much you owe your suppliers, and of course planning for unexpected expenses. The overall end-goal is to keep your cash flow in the green. At risk of sounding redundant, if you aren’t sure how best to track cash flow, you need to consult a professional.
6. Invest in software to help keep track of your finances
So, in theory, you know what you need to do, but how do you actually keep track of this data?
Excel spreadsheets are great, but they usually aren’t enough to manage the complexity of business finances. Even if you have a general idea of how spreadsheets and the formulas they use work, creating a comprehensive Excel spreadsheet to manage everything from cash flow to payroll is extremely difficult.
For our clients, we typically recommend that they invest in some sort of money management software to help them keep track of their business finances. If you aren’t sure which software to select or need help learning to use programs like Xero or QuickBooks, just let us know.
7. Review your budget every month
Whether yearly or monthly, budgets are not “set it and forget it” documents. In order to really stay on top of your company’s money matters, you should compare actual results with expected results every single month.
Reviewing your budget on a monthly basis will not only keep you on your financial game, it will also allow you to make any necessary adjustments. As Benjamin Franklin said, “Knowledge pays the best interest.” Even if you think you might have busted your budget, you need to face the music and figure out how to adjust for the following month. We all make mistakes. Learning from those mistakes is the key.
8. Consult a financial professional
We understand that money management is complex – especially when it comes to business. The Small Business Administration also has some great pointers for business budgeting here.