In the current economic scenario, which has been mercilessly tough on almost all businesses, it is extremely important to work towards creating financial security for your small business. Going into debt is the last thing you want, as that would only add to the stress of doing business in a difficult economy.
One of the most crucial skills that an entrepreneur needs to possess is planning a budget in a way that enables him to spend tactfully on necessary items, without having to scrimp too much. Making a smart budget is critical to running your business successfully, even in an uncertainand volatile economic scenario.
Successful businesses do budgeting to monitor their costs as it enables them to figure out exactly how much they can spend, save, and invest.
Mentioned ahead are a few smart budgeting tips for small businesses.
Allocation for Business Needs
Every business has certain necessary requirements which have to be met, so by all means do allocate money to such needs. Make sure you don’t spend exorbitantly though. If you think buying that vending machine can be postponed to the next month, do so. However, buying a computer for that new employee cannot wait, so you will do well in allocating money there.
Creating an effective budget does not imply you simply distribute your finances equally among all departments, as that defeats the purpose of making a budget. You need to figure out the requirement for the effective functioning of every department and allocate your financial resources accordingly.
Forecast Your Spending
Take a look at your spending history, and consider how much you will have to spend in the coming year. Take both these factors into account when budgeting, and budget before you spend.
This is an effective way to determine the best course of action for a small business to know how much money needs to be spent to run the daily operations and how much needs to be made in order to break even.
For ease of tracking and understanding your finances, it is best to segregate your budget into 4 categories i.e. fixed expenses, variable expenses, prospective income, and paycheck allowance.
Focus on Investing
Rather than simply spending hugeamounts of your hard-earned money on depreciating items, it makes sense to invest them in things that will reap you long-term benefits.
Short-term investments, though quick to reap, have little implications on your business. Long-term investments, on the other hand, allow you to reap the benefits for much longer.
Do make sure that your cost-benefit ratio is balanced. If your costing is higher than the benefits you receive, your business is heading for an implicit doom.
Record Your Financial Transactions
In order to keep a track of the where, when, how, and what of your expenditure, you need to chronicle the monetary inflows and outflows. Make sure you keep the receipts organized, and in a safe and easily-accessible place.
A few tips for maintaining your financial records are as follows:
- Store your receipts either physically, in files, or scan them and save the electronic copies to a dedicated folder(s) on your computer.
- Organize them alphabetically, i.e. according to the name of the clients. Use bookmarks/separators of different colors to be able to distinguish between them.
- If you’re storing them physically, keep them away from wet and other high-risk areas.
- To avoid losing your receipts, make a note of the different places where you store them and keep them in lock and key.
Being tight-fisted will do you well, especially when it comes to controlling your costs.
Every business incurs 2 types of costs – fixed costs and variable costs. While you cannot do much about controlling your fixed costs, you can certainly play around with the variable costs.
Instead of buying expensive software, make use of free and open source software. Instead of traveling long distances for meetings, arrange for video conferences on Skype. If you can, try and barter professional services and help them out in some other way in return.
As you can see, being thrifty need not imply that you lose out on something.
Keep Business and Personal Finances Separate
As tempting as it may be to make up for your business losses by using money from your personal account, avoid doing so at all costs. You’re sure to lose track of your cash reserves this way.
Have separate and dedicated accounts for both and make payments as per their end use. Pay for your business expenses using a business credit card with a fixed credit limit to regulate your expenses.
Assess the Results
All businesses set targets for themselves on a quarterly, half-yearly, or annual basis. You will need to assess the results achieved accordingly.
At the end of every month, compare your budget plan with the results achieved. If the results are not satisfactory, you need to figure out the reason behind this. Doing so will give you a fair idea of how you can achieve better results in the subsequent months.
Risk management should be a priority with small business owners, who will do well in keeping aside a contingency fund which can be utilized in times of dire need. These funds should be used only when there’s no other financial aid left to salvage your business.
Risk management will also bring to light and mitigate the risk factors that may have gone unnoticed by you in the past, as well as other risks that can pose a threat in the future.
Small business owners tend to believe that budgeting is meant only for large organizations. This notion, however, is wrong. They need to know about it as muchas a global company. It is a great way to meet profit targets and avoid costly surprises later.
A budget is a great tool which can be used to balance your revenues and expenses. Of course, budgeting isn’t an exact science and will need to be tweaked several times, especially in constantly fluctuating economic conditions.
Andrew Cravenho is the CEO of CBAC – an innovative invoice finance company. As a serial entrepreneur, Andrew focuses on helping both small and medium sized businesses take control of their cash flow.Prior to CBAC, Andrew founded an annuity financing company relieving tort victims of financial hardship.