BBB tips for a better business budget
Maintaining a healthy cash flow is essential for keeping businesses afloat.
With numerous financial factors to consider, such as employees, technology, tools, equipment, payroll, and rent, it’s no wonder that managing finances is a top priority for new business owners.
While it’s not simple, committing to the financial management skills is essential to ensure a successful launch and sustained business model. While your idea may be unique and successful, improper financial planning for employees, supplies, or rent can quickly eat up your profits. Most small business owners wear many hats, but the successful ones are experts in budgeting to maximize profit margins.
Keep your small business on track by establishing and maintaining an effective budget that helps increase profits. While certain costs may come up once a year or once a quarter, your monthly operating budget is focused on recurring costs and incoming revenue.
Creating a business budget allows you to track expenses, allocate money and forecast revenue based on your needs. This is even more important for seasonal businesses that must plan for the leaner months. Outlining the monthly highs and lows lets you plan, cut expenses or dip into reserve funds if necessary.
As you develop a business budget, find one that suits your needs and input the relevant numbers to start. Remember, save copies of invoices and receipts as a budget backup and for possible tax filing or IRS disputes. You may find some valuable business budget tools online. Some key components are:
• Estimated revenue: This is what you plan to take in from sales each month. After you’ve been in business for over a year, you’ll look at historical numbers, but new businesses can use industry averages. As you record these data points, note where you got certain figures. For example, a cafe owner may have gained business due to an occurrence of a local convention.
This snapshot can help you determine where to cut expenses and how to tighten your budget to pursue short- and long-term financial goals.
• Fixed costs: These are costs that remain the same each month. Knowing how much you must sell or how many clients you need to cover fixed expenses is essential to making smart business decisions, especially when pricing goods or services. Some examples of fixed costs include rent, utilities, employee costs, and taxes.
• Variable costs: Also referred to as controllable costs, these expenses vary depending on your volume of business. Remember, because they vary from month to month, these are estimates. Some examples of variable costs are supplies for goods you produce, advertising, commissions, and shipping costs.
• Irregular costs: These costs may not occur every month, such as professional memberships, equipment upgrades or new office furniture and dues for professional memberships.
• Cash flow: This term refers to the money coming in and out of your business. Positive cash flow means you have more money coming in than going out. Your budget should be able to give you a snapshot of your cash flow at any given point, assuming you’re entering your expenses and revenue in a timely and accurate manner.
Your profits are the money left after paying expenses. You may save profits for a rainy day, reinvest in the business or keep these funds for yourself. If your small business profit margins aren’t where you anticipated, it may be time to cut costs, raise prices or drive more business with a larger advertising budget.
Always update your business plan with short- and longer-term goals and you may even choose to create a business plan that lines out benchmark goals for financial success, reputation in the community, setting a strong culture, and your own expertise within the business.
A budget is a key component to growing your labor of love. Creating one for your small business can help you reach long-term goals, retire successfully, diversify, and reinvest, and may even include an exit strategy.
A well-structured budget enhances your credibility when seeking a small business loan from banks. Financial institutions want assurance that their investment is secure and will be repaid. By showcasing effective cash flow management, you present yourself as a more appealing candidate for lending.
• Steve J. Bernas is president and CEO of the BBB of Chicago & Northern Illinois. He can be reached at sbernas@chicago.bbb.org.
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