61% percent of small businesses did not create a financial budget, or any budgeting plan, in 2018.
No wonder so many small businesses fail.
If you are in the process of starting a small business, you know that it requires a substantial amount of money.
Unfortunately, the expenses continue to grow even after finally opening the doors to customers.
Business budgeting is not for the faint of heart. Luckily, there are proven methods that will set you on the track to success.
Keep reading for ten steps to successful business budgeting.
1. Do Your Homework
Do not expect to sit down and knock out your budget in a few hours without doing your homework first.
The purpose of a budget is not to manage every cent spent running your business. It is to understand how you are spending money to help you make smarter spending decisions.
There are also several ways to approach a budget. While you might start creating a budget that estimates net income, you could switch to a budget that focuses on cash flow. Some organizations end up with two separate budgets for this reason.
2. Set Up a Budget Spreadsheet
The first step is determining how your budget will look on paper.
Whichever way you choose to set up your budget should make sense to you first. Do not use someone else’s template you borrowed from the internet and expect it to make sense for your business.
Set up your spreadsheet to estimate what portion of your revenue needs to be allocated to operating costs. Do the same for raw materials, taxes, insurance, rent, and other expenses.
3. Factor in a Cushion
When setting up a budget, always overestimate your costs.
You will estimate that your business will generate a certain amount of revenue and that certain expenses will not fluctuate. Keep in mind, however, estimates are not set in stone.
For this reason, always factor in some slack. Try to save money before expanding your business operations or hiring new employees.
4. Know Your Sales Cycle
Depending on what niche your business is in, you will likely have a high season and a low season for generating revenue.
Collect data and analyze it so that you can pinpoint the highs and lows in your sales cycle.
Consider using your slow periods to prepare for the busier times. Socking money away while you have it will help you deal with unforeseen circumstances later.
You can also use this downtime to focus on marketing efforts, employee development, and customer research. Regardless of what you choose to do, try to keep money in the bank whenever possible.
5. Understand Your Risks
Even the most successful businesses must identify and manage their risks. These risks have the potential to impact your company in a big way financially.
Small businesses must consider all short- and long-term threats to plan for financial security in the future adequately.
Ask yourself questions that help define your risks. Do you operate in a location that frequently experiences natural disasters? Is your workforce primarily made up of seasonal employees?
These questions will help you map out emergency planning, securing insurance needs, and other proactive measures.
6. Keep an Eye Open for Savings
Even if you are right on track with your budget, always look for ways to save money.
Money saved now will help you deal with potential hard times in the future.
Do not be afraid to collect quotes from vendors and suppliers to be sure you are getting the best deal. You want to ensure the financial success of your business, and all vendors are in partnership with you – they will not be offended if you choose someone else.
7. Consider Cost Cutting
Are you having trouble sticking to your proposed budget? Consider cost-cutting to “find” money you did not know you had!
Depending on what industry your small business is in, you may be able to save money by waiting to make reoccurring purchases at the start of a new billing cycle or take advantage of early payment discounts.
If you are thoughtful about your expenses and how your business operates as you are budgeting, this process will give you breathing room when you are cutting it close.
8. Incorporate Time into Your Budget Plan
Many small business owners make the mistake of not incorporating their time into their business’ budget.
When you are paying employees for their time, it is essential to allocate their hours effectively. Do not underestimate how long projects take. If your team is off schedule, you are bound to go over budget.
To eliminate this problem, set later deadlines. Even if you are confident that your team will finish a project earlier, you will have a cushion just in case the project goes awry.
Plus, customers appreciate when work is completed early, so impressing them will go a long way to secure future business.
9. Review Your Business Budgeting More Often
Large companies are like well-oiled machines. They are able to set their budget for the year and not look back. Small businesses cannot enjoy this luxury.
It is crucial that after setting your budget, you revisit it again and again. It takes time to get to know your business, and seasonal trends affecting your budget and efficiency. Until you are confident, revisit your budget monthly to gain better control over your financial decisions.
10. Consider Securing a Business Loan
After you have done all of this hard work budgeting, you might still need some help. Taking out a business loan is the reality for many small businesses looking to get their business off of the ground.
Lenders will want to look at your business plan, current books, and proposed budget before agreeing to offer you a loan. The budget shows the bank what you will do with the money, and what your cash flow looks like for the next few years.
If you do not spend time perfecting your budget, the bank may not be interested in lending you money. The first step to requesting a loan for your small business is to request a quote.
Failing to Plan is Planning to Fail
If you fail to budget and spend accordingly, your business will be in trouble quick.
You must practice business budgeting to improve at it, but it is a skill that will serve you well. The goal is to make sure an adequate amount of money is available to keep business running as usual but also enables it to grow.
Successful budgeting will also ensure a substantial emergency fund should you need it in the future.
If you are ever in need of a loan to pad your budget, we have experts that will help you achieve financial goals. Contact us to get started on your loan application.
Combining a high level of personalized service with a cutting-edge lending platform, Formula Funding delivers an unparalleled banking alternative. We offer a fast and efficient option to get your business the critical funding it needs without the red tape. We work with all credit grades, tax liens, judgments, and charge-offs – something unheard of at a traditional bank. Since 2010 over 15,000 small business owners have used our funding sources to grow and expand.