How to Create an Efficient Budget for Your Small Business
Photo by olia danilevich from Pexels
Failing to budget effectively can quickly lead to cash flow problems. Keeping track of the money that comes in and out of your business and ensuring you have enough to cover expenditure is key to its long-term survival.
Whether you are just starting up a new enterprise or have been running one for a while, here are some important considerations and steps you should take when putting together your business’ financial budget:
Assess Your Costs
The first step to getting your finances in order is to assess what costs you have. There is no point making a rough estimate of this as you could end up with a shortfall in your budget when you fail to take into account a forgotten or unexpected expense.
Your costs will include fixed costs, variable costs and other one-off costs that come up from time to time. Your fixed items are things like insurance, rent or mortgage, license fees, internet and potentially employee salaries, whereas variable costs may include contractor fees or raw material costs. If in doubt it is usually better to overestimate your costs than underestimating.
Look at How You Can Cut Costs
Your budget making time is an ideal time to look at where you may be able to cut costs to lower your expenditure. One way to do this is to negotiate prices with your suppliers to see if you can get a better deal.
Now it’s time to look at your estimated revenue.
You should be looking at your revenue on a regular basis, it is recommended that you take stock of your revenue on a monthly, quarterly and yearly basis and keep an eye on any emerging trends.
To predict future revenues you can look at previous revenue and take into account any changes in the market and internal factors within the business. While most businesses hope to grow their revenue year on year, it is important to be realistic about how much money is expected to come into the business.
Gross Profit Margin
Now that you have some awareness of your revenue and expenditure you can begin to build a picture of your business’ current and future profit margins. To calculate your gross profit margin, use the following process:
- Subtract the cost of sales from your revenue to find gross profit.
- Divide your gross profit by your revenue.
- Multiply your answer by 100 to get a percentage.
Online accounting tools can be great for helping you calculate these figures and for keeping track of your income and expenditure. They can even generate reports and forms that you need for paying tax and meeting local or state requirements.
Look at Your Cash Flow
When projecting your cash flow you need to consider both your customer payments and your vendor payments. Take into account the payment terms that you offer your customers and the payment terms that are offered to you by your vendors.
Be aware that your cash flow forecast may be impacted by customers who fail to pay in the agreed timeframe. Make sure you have a process in place for how you recover payments or handle debt in these circumstances.
Make Sure You Factor in Demand and Other Forces into Your Budget
Seasonal trends may have a big impact on your budget, depending on the nature of your business. For example, labour costs may be high at busy times in the year and low during your industry’s ‘off season’.
The challenge for businesses is often to generate enough income in their busy season to be able to survive through quieter periods of the year. The budget you create should reflect this.
Set Budgets for Each Area of Your Business
Budgets should be set for all activities in the business. For example, you will need a marketing and advertising budget to help promote your business.
Finally, you can bring all of these figures together and monitor your business’ budget using an online management tool or software. For example, if you are in the fitness business, you can take advantage of a gym membership software free as it allows you to manage your cashflow, send invoices and keep track of payments. The free software is for smaller gyms and studios looking to grow and develop systems.