Budgeting 101 for Small Businesses
October 29, 2014
Starting a business can be an exciting prospect, but comes with plenty of hard work too. If you have just started a new business or taken ownership of one, you may be more attuned to the activity on the sales floor or in the production department than the behind-the-scenes details. When it comes to business, those unseen elements such as bookkeeping are what keep things running smoothly. Tracking revenue and expenses, as well as planning for the future is the key to success. Although there is a certain requirement of experience, learning on the job can be easier when you have a few extra tools in your belt. Learn the essentials of business budgeting.
Why a Business Budget is Critical
Just as with a personal budget, a business owner needs to balance money coming in with money going out. You must be able to determine whether funds are available for everyday expenses, as well as for making investments that will ultimately grow the business. Without a plan in place, it is too easy to overspend. For businesses that have the assets but are not making the investments, the business can become stagnant. Although small business loans and credit are an option, it is still necessary to create a budget to know how to appropriately handle those funds.
How to Create a Business Budget
A budget does not need to be complicated to be valuable and helpful. It should include three main categories: revenue, expenses, and profit. When a business owner tracks revenue and expenses, the amount remaining is the business’s profit. Ultimately, whatever style works best for you is one that you can stick with on a daily basis. Most budgets can start out in the same basic format as a personal one. Start by listing all expenses and their typical values. Track revenue over time and project future increases to plan ahead. Expenses and revenue are often organized into a few categories, rather than noting each as an independent line item, for ease of organization.
For small, home-based businesses, there are two strategies suggested by small business owner Suzanne Greer of Studio Helper that may be applicable: a static or flexible budget. A static budget is effective when income and expenses stay relatively fixed. It creates a set value for every field and only requires the business owner to stick to those amounts. A flexible budget is more common when income and expenses can vary widely per month. It can be harder to budget when values are unknown, but projecting expenses within a range can help.
Tips for Setting a Budget That Works
1. Plan for Unexpected Changes.
A budget is a plan based on anticipated income and expenses for a future time period. This number is based on previous records, but unexpected events can occur. The price of supplies may go up or sales may dip at certain points in the year. It is important to keep a reserve available for when this happens. When a business is prepared, it can better handle an unexpected wave without significant loss.
2. Make a Comparison with Industry Standards.
Ultimately no two businesses are alike. However, research can be a helpful tool when trying to predict future revenue. Compare with local and national businesses of a similar size in appropriate markets to determine these figures. Precise amounts are not essential, but you should determine what appears to be the average. This information can be found through local merchant’s associations and business bureaus, as well as with the Internal Revenue System.
3. Determine Which Expenses Can be Cut.
When your profit margin is small, sometimes the only way to find extra funds is to cut expenses. Negotiate contracts with suppliers and creditors to make sure you are getting the best deal possible. Shop around for new suppliers when necessary. Consider any expenses that can be eliminated or postponed. Ultimately, when the funds are not available, you cannot spend them.
4. Regularly Review the Budget.
For big businesses, an annual budget is standard and practical. For smaller businesses however, small fluctuations can have a bigger effect. Investopedia recommends reviewing the budget as often as every one or two months. Business is often tighter for small businesses, so an unexpected windfall or loss can be significant.
5. Keep a Close Eye on Inventory Numbers.
Tracking inventory accurately with barcode technology can be a surprising method for saving money. Knowing precisely how much of each product is in stock is a twofold benefit. First, you can avoid spending unnecessarily on products that are not selling. Second, you can anticipate items that sell more quickly and reorder before they become out of stock.
Ultimately, budgeting is a personal process that requires no small amount of skill. Practice and attention to detail are a must. Using technology like the integrated Shopify platform and hardware can help.
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