As a small business, you know that every dollar is important. From one day to the next, you need to know where your money is being spent and whether your current strategy is the most efficient one to carry the company forward.
Unfortunately, one of the biggest mistakes that small businesses make is not planning ahead with money. After having tunnel vision for so long, they suddenly look up and realize that they can’t afford the planned marketing campaign.
As a small business, a budget is essential. Having low-cost business ideas in place will ensure success in the short-term, but you need to do more than that. How do you plan for this and keep the business in a strong position for the present and future? Let’s take a look!
Step 1: Assess Income
Before anything else, you need to work out how much money the business brings in over the course of a month. Whether you use an app/software that tracks income or do it all manually, see how much you earn in an average month.
If you have somewhat of a seasonal business, keep this in mind. Even if it’s not a seasonal business, consider the holiday sales and other special occasions when the sale can be different than normal. For example, don’t spend all your money in summer if you know that winter will be quieter for revenue.
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Step 2: Write Down Fixed Costs
Now you have your income, tally up the fixed costs and subtract these from your revenue. If you aren’t sure of this terminology, we mean costs that are absolutely necessary and appear every single month. For example, this will include rent, payroll, and insurance.
While on this note, remember that outsourcing payroll to a specialist company like Paycom.com or ADP can help significantly with budgeting.
Step 3: Consider Variable Expenses
As well as your fixed costs, you’re also likely to have some variable expenses. Although they don’t appear as a fixed amount each month, they still need to be considered to help with budgeting. Examples of variable costs include raw materials, credit card fees, and other supplies. With raw materials, this amount will grow as you scale the business.
Step 4: Keep an Amount for One-Off Spends
Normally, we see businesses get to this stage and then see their leftover money as free cash. This is a risky strategy. Why? Because all it takes is one broken machine, a faulty computer, a parting employee, or damaged stock, and you’ll be in trouble.
Therefore, we always recommend keeping a certain amount aside for a rainy day (so to speak). Even if you don’t touch this money for a while, you will be glad when you finally need it.
Step 5: Bring Everything Together
Often, people panic when we mention budgeting or profit and loss statements, but it doesn’t need to be difficult. When creating a budget, start with the income, subtract the fixed costs, make sure you’re aware of variable costs and have a small contingency in case something goes wrong.
At this stage, you’re in complete control of your budget. You know how much money enters and leaves the business, how much you have stored away, and, most importantly for this guide, what you have left over to spend elsewhere. Now, you have an accurate estimate of how much you have to spend on marketing, research and development, emergency funding and other areas. As long as the contingency remains, you can spend this money in the knowledge that bills are covered, and you have some saved for emergencies.
There we have it, your guide to budget planning for small businesses. It’s a simple skill, but one that many businesses before you have failed to learn. Good luck!