It’s estimated that 80% of businesses close their doors within five years. Now, there are plenty of reasons as to why these enterprises fail, from a paucity of sufficient cash flow to an ineffective business model that was written on a cocktail napkin.
An independent restaurant, a retail storefront or a hair salon; it doesn’t matter what you specialise in. It still needs to follow the laws of economics.
One of the more common causes for a company to crumble is because they refused to create a budget or, at the very least, maintain one. While it may be a tedious task to perform on a weekly basis, a budget is essential to the success of your entrepreneurial objectives. Ultimately, operating a business without a budget is like walking around blind without a cane.
So, if you’re thinking about launching a technology startup or you have already opened your pizzeria, then here are a few elementary steps to creating a business budget – and sticking to it.
1. Use Software to Maintain Budget
Back in the day, old men would sit in the back with their massive calculators, wearing their poker hat visors and pulling the lever. That has drastically changed over the years.
Today, it is a lot simpler: you can download mobile applications, automate the budgetary calculations and insert the numbers within a matter of moments. Some of these are free, and some of these come with a premium.
The main difficulty is choosing which software to download. For the most part, businesses will utilise Microsoft Excel and produce and maintain spreadsheets for their business budgets. There’s an abundance of other programs and apps to take advantage of, though, such as Quicken, Mint, Scoro or NetSuite. These are even more attractive when you know that you can fiddle around with these budgets when you’re on the go.
2. Calculate Your Income Sources
The very first step of crunching the numbers is to determine your income sources. In other words, it is important to find out how much you’re making and where it is coming from. If you skip this step and try to keep up with the revenues in your mind, then you will lose track and spend more than you’re making.
Your business income could consist of the following:
These are just some of the ways your small business can add funds to its coffers. It is imperative that you write down how much you earn every month and where it is originating from.
3. Tally Business Expenses
Business owners loathe adding up the monthly business expenses. Not only because it gives you a headache when the final number gets bigger, but it is also frustrating when you’re attempting to factor in costs that happen every month and expenses that occur bimonthly or quarterly. This is known as fixed and variable.
There is one more category to add to your budget sheet: one-time spends, items that you plan to only spend on a single occasion.
For instance, your fixed costs will include rent, salaries, telecommunications, website maintenance and insurance. Your variable expenses will consist of contractor wages, transportation, utilities and marketing. One-time spends will range from computer equipment to furniture to software.
Putting it all together can be a hassle, but it is a worthwhile pursuit because you know where your business funding is coming and going. Your capital is finite and scarce, so you don’t want it to be wasted.
4. Forecast 12-Month Cash Flow
You don’t need a crystal ball to try to forecast your cash flow over the next 12 months. Instead, you may need to stimulate your little grey cells, plan your future and know how to establish a handy worksheet. That said, like calculating your monthly income and expenses, a 12-month cash flow forecast is worth it.
How exactly can you peer into the future? Here are a few suggestions for the template:
- look at your sales projections and identify the fluctuations – never overestimate your sales
- write down revenues in the month they are received, not when invoices are sent or when goods are sold
- consider recurring variable expenses, such as months with three pay periods or quarterly taxes
- anticipate unexpected costs by setting aside 5% to 15% of your monthly revenues
- add all the numbers together by factoring opening bank balance with your projected revenues for specific time periods.
5. Establish an Emergency Reserve Fund
Financial experts recommend households to institute a rainy-day fund for those unforeseen circumstances: a broken refrigerator, a leaky rooftop or a dead car battery. You don’t want to use the credit card or tap into your retirement savings to cover these surprising expenses.
Ditto for businesses.
A recession strikes the country. A trade dispute takes place. A construction project occurs outside of your establishment. These are all aspects that can happen at any time, leaving your small business vulnerable to external factors. This is why it is critical that firms create an emergency fund, too.
Of course, developing an emergency fund for your business is quite different than producing one for your home. With that in mind, here are a few suggestions:
- set aside the spare change from customers
- save when business is booming
- introduce an annual cost-cutting measure
- encourage employees to reduce monthly expenditures
- transfer savings to an interest-bearing account.
6. Plan for Regular Budget Reviews
Let’s be honest: not every single budget is going to be 100% accurate. You will have months where your budget projections were incorrect – major or minor. But this should never deter you from dismissing the budgetary method. Instead, you should plan for regular budget reviews to determine what went wrong and what went right.
At the end of the month, sit with your staff at the office, put the Excel spreadsheet on the projector and meticulously comb through it line by line. By keeping your team in the loop, they, too, can be concerned about fiscal matters – personal or corporate.
Transparency and cooperation are the orders of the day.
7. Consult with a Professional
By the end of it all, you may need to concede defeat and tell the world that you can’t do everything on your own, no matter how resourceful, astute and dedicated you are. Indeed, creating and maintaining a comprehensive business budget is not a walk in the park, as it does require a lot of attention to details and hours that are allocated from one area of the company to another.
Therefore, it would be recommended to consult with a professional. A business consultant, a financial adviser or an accountant can help you achieve your business goals when your hands are too full with all of the other tasks.
So, what exactly can a consultant do for you? Some of these involve identifying risks in your budget, assessing your overall financial picture and, most important of all, establishing a thorough financial plan.
8. Create a Contingency Plan
Oftentimes, owning and operating a business in today’s ultra-competitive, highly advanced and fast-paced global marketplace is like playing a game of chess. You need to employ a strategy, have incredible foresight and the knack of knowing what your big business opponent is going to do next.
Simply put: when devising your business budget, you should add a component that includes a contingency plan. This requires you to consider every step of the way, potential industry changes and other barriers that could impede corporate growth.
Unsure what to do? In your monthly budget, think about this:
- perform a risk and cost-benefit analysis
- think about every decision and its impact on annual business performance
- determine how you will minimise losses in critical business areas
- plan for financial underperformance
- discuss costs with suppliers to reduce expenses.
No matter what your specialty is, what industry you are in or how much capital you had at the beginning, you will always need a comprehensive budget. Should you toss the concept to the waste bin, then you inevitably increase your chances of shutting down within the next few years, joining the 80% of other companies that have perished in the same timeframe.
It can be difficult to come up with an in-depth, detailed and accurate business budget. Let’s face it: revenues ebb and flow, expenses vary from month to month, and your forecasts haven’t exactly planned out. That said, a business budget can serve as a fiscal blueprint that can allow you to stick to your financial aspirations, modify your spending habits and invest in a particular area of the company.
That’s the beauty of a business budget: it can be a living document – or spreadsheet.
Have you produced a business budget? Let us know in the comments section below!
Still in the early stages of setting up shop? Find out how you can finance your business and get up and running in no time.