The running of a small business requires more than just knowledge of the trade; it requires knowing how to manage your expenses and set clear budgets. Budgeting is crucial for the success of any business. Knowing how to estimate and match your expenses to your revenue helps you determine whether or not you have enough money to fund operations, expand your business and generate profit. Without a budget in place, businesses run the risk of spending more money than they take in or not investing enough in the prospect of growing the business.
While every business has a slightly different way of creating and maintaining a budget, there are some key practices that companies should follow when attempting to create their budget. The following tips were created to help small businesses finesse the perfect small business budget.
- Check Industry Standards
While every business is different and unique, there are always similarities between any type of business. Research the industry, speak with business owners in your area and check the IRS website to get a clear picture of what percentage of the revenue coming in should be allocated to each cost area. As you get a good look at industry standards, remember to look at for an average, not specifics. - Create a Spreadsheet of Estimated Costs
Create a spreadsheet to estimate your business’ total cost and the percentage of your revenue that will need to be allocated toward raw materials and additional costs. Contact suppliers prior to working with them and get an estimate of their costs. If you are just starting your business, do the same thing for rent, insurance, taxes, etc. - Prepare for Changes in Your Budget
Remember that these are estimates, not figures that are set in stone. Just because you estimated that the business would generate a certain rate of revenue growth or that certain expenses would be fixed or controlled doesn’t mean that it will happen. The business world is always changing and companies need to be prepared for whatever comes their way. It’s wise to factor in some breathing room in your budget and make sure that you have enough money to cover expenses before deciding to expand or hire new employees. - Cut Costs When Times Get Tough
Consider cutting your costs when times get tight. Start with the items that can be controlled to a large degree. Ask yourself the following questions: What costs can you cut back on without affecting your company’s revenue generating capability? What costs can you better control in order to cut costs?In addition to cutting costs, you should wait to make purchases until the start of a new billing cycle, or take advantage of payment terms offered by suppliers or creditors. Carefully examine your costs and options in order to create more breathing room in your budget. - Review Your Budget Periodically
While many larger businesses draft a yearly budget, small businesses should re-evaluate their budget more often. In fact, it is wise for a small business owner to plan only a month or two in advance due to the volatile nature of business and unexpected expenses that could affect revenue estimations. - Re-evaluate Services/Suppliers
Do not ever hesitate to research new suppliers or ways to save money on services being performed for your business. Re-evaluation should occur at various stages of the business cycle, including at the start-up of a business, annual or monthly budget creation, and during periodic business reviews.
As you can see, budgeting is an easy – but essential – process designed to help companies forecast (and then match) their current and future revenue to their expenses. The ultimate goal of a small business budget is to ensure that there is enough money to keep the business running, grow the business and have funds available should emergencies arrive. For more information on budgeting for small businesses, click here.