Despite being the backbone of any business – big or small – many owners fail to adequately maintain and update their budgets on a periodic basis, leading to the need for small business financing. When business is going well, owners are busy keeping up, and when business is slow, looking at the books can be overwhelming.
But budgets are immensely important to your business’ operations. A good budget will make an informed projection of your expected receipts and expenditures, which can help you manage costs, determine the feasibility of profit goals and keep your business on course from quarter to quarter.
The basic components of a budget include sales, revenue, costs and expenses, which when correctly calculated will determine your projected profits. The sales and revenue represent the cornerstone of any successful budget, and should be as accurate as possible.
Here are eight simple tips for building a better budget for your small business:
- Write it down
This might seem like a no-brainer, but many people simply think they can keep a running balance of revenue, expenses and other costs all stored in their head. No matter how photographic your memory is or how good with numbers you are, writing down and seeing the numbers on a page or in a spreadsheet not only helps you visualize this crucial information, it also gives you a quantitative representation of your business’ state of affairs.
- Don’t rush it.
Building a successful budget requires you and your management team to invest a significant amount of time to ensure your numbers and projections are accurate so you can make informed decisions concerning the future of your business.
- Be realistic with it.
As you attempt to make the most accurate projection as possible, it’s wise to err on underestimating profits. This way, if profits do not meet expectations, you might be left with unpaid expenses and the business could be left in the red. On the other hand, if you exceed your initial estimates, you will have covered your projected costs and expenses and turned a nice profit.
- Generalize it.
Budgets are not intended to represent a detailed accounting of every last penny your business earns or loses. A solid budget will act as a general map for project managers to follow so they can make any necessary financial course corrections. Micromanaging every single dollar and cent would be too timely and exhaustive to be effective or efficient.
- Update it constantly.
Many small-business owners tend to build a budget by determining a projected profit and then subtracting the anticipated expenses they will have to make to reach that projection. And then they put it away until next year. While this is a good start, unless you review and update the numbers on a constant basis, you will be unable to make any necessary adjustments. Business is not a static enterprise and your budget should reflect this fact.
- Change it accordingly.
During your periodic budget reviews, don’t be afraid to change your projected plans to create positive benefits. You might be under-investing in your workforce or over-investing in marketing. Move some numbers around and make a change, and then during your next budget review, check to see if any changes have made a positive return on their investment. If not, return the budget items back to their previous allocations. Maintaining an up-to-date budget allows you track these changes and see what is and what isn’t working.
- Be flexible with it.
Good budgets should be fairly concrete, with room for malleability. This means you might have to make hard decisions that involve compromises and tradeoffs over what you want to do versus what you must do. Your business only has so many resources to work with, so you must be disciplined when it comes time to cut popular budget items to make room for other more important items.
- Separate its contents.
Be sure to properly distinguish between categories. For instance, cash flow and profits are two separate concepts that should be treated as such. Just because a company is turning a profit, it does not necessarily mean they have a strong cash flow. Without a steady cash flow, you cannot pay the necessary expenses and costs to keep the doors open and the lights on in your business.