While many small business owners have a budget, most don’t know how to maximize this resource to obtain financial freedom in their business. Successful small business budgeting begins by identifying profit and then wisely allocating expenses where you need them most. Sounds Easy, Right? Unfortunately, managing cash flow is one of the most challenging aspects of being a business owner. Below are 3 tips to build your business while you budget and how you overcome the challenges associated with budgeting.
1. Create Realistic Cash Flow Goals
Make sure your cash flow projection is realistic. Don’t assume your sales will be more than or even reach your projected market potential in your first year of operation. While it can be difficult to project income since you don’t know exactly how sales will go in any given month, be as realistic in your projections as you can. It’s better to underestimate than overestimate your potential business income than to overestimate when you come to budgeting.
2. Know Your Cost of Doing Business – Your Essential Expenses
Essential expenses incurred in running a business include wages, taxes, rent or mortgage payments on the business property, and operating expenses such as power, water, Internet and telephone bills. Be sure to calculate these essential expenses for the first year at the most and the first six months at the least so you can anticipate. Also, plan for big expenses and anticipate when your business will incur them in order to save for them along the way to minimize their effect on your bottom line.
3. Pay Cash For What You Can
While it may be difficult to start a business without incurring some debt, you’ll want to reduce the debt as quickly as possible. Debt costs the business more in interest repayments, so having a budget that has the business operating in the black sooner is always a good idea. If you do take out a debt for your business, ensure you will be able to make the repayments every month.
Bonus: Never Spend All of Your Profits
Always keep some of your profits to put towards your business savings. Have a budget set up that allows you to spend less than you expect to make. Be sure to come up with a reasonable salary for yourself and pay it monthly out of your budgeted business expenses. If there are months were you make more than expected, be sure to adhere to your written budget and keep the additional profits aside. That way, if the sales fall unexpectedly in one month, you’ll have enough funds available to cover the shortfall.
Just like market trends keep on changing, your business needs, expenses, and revenues will keep on changing as well. For that very reason, regularly revisit your budget to help you better control financial decisions because you will know exactly what you can afford to spend versus how much you are projecting to make.