Creating a realistic budget is one of the best ways to protect your small business during periods of difficulty and keep it running smoothly despite setbacks.
A budget gives you more control over the financial health of your small business, allowing you to manage cash flow, create spending caps and set realistic targets. The small businesses that succeed are the ones that prepare and adapt when necessary, so smart budgeting is non-negotiable.
Here are five useful budgeting tactics that you can use to help your small business survive, grow, and flourish.
1. Calculate Your Costs
The first step towards creating a realistic budget is calculating your expenses. This step forms the basis for the rest of your budget, so it is important to be as accurate as possible. Meticulous bookkeeping is enormously helpful for this, but if your small business is new, you will need to do in-depth research. If in doubt, overestimate. It pays to be cautious!
Your costs fall into two categories: fixed and variable. Fixed costs account for things like rent, which stay the same every month. Meanwhile, variable costs fluctuate along with your volume of work. Raw materials, supplies, or power usage are examples of variable costs.
You will also have to factor in marketing, advertising, and legal expenses; these can quickly grow out of control, so it is wise to double or even triple your estimate, just to be on the safe side.
If possible, have your business partner or accountant look over your estimates. A second pair of eyes is always helpful, and they may be able to point out things you have missed or costs you may be able to reduce.
2. Estimate Your Revenue
Estimating your revenue is notoriously difficult and requires extensive research or even professional advice. However, do not skip this step. It is worth putting time and effort into creating a realistic estimate because it allows you to plan expenses and manage cash flow. You should make both an aggressive and conservative projection. The former will boost morale within your small business and motivate staff to work harder, while the latter will allow you to make safe decisions about your finances.
3. Work Out Your Gross Profit Margin
Your gross profit margin is a measure of how much money you are making. It is important to calculate this figure regularly and keep track of your progress so that you can understand whether your small business is growing, and at what rate.
To work out your gross profit margin, subtract your costs from your revenue. Then, divide this figure by your net sales to find the percentage of your margin. If this number is increasing each month, that is a great sign. If it is decreasing, it may be time to reduce your spending.
4. Plan for Cash Flow
Gross profit margin is important, but cash flow is equally vital to the health of your small business. Expansion, seasonal trends, and economic conditions can all impact your cash flow. It is important to have an idea of how much money you will have available to you at different points during the year so that you can plan accordingly. Bear in mind that fluctuations in your sales volume will directly impact your variable expenses.
If you have been in business for a year or more, you can use past data to predict what your cash flow will look like each month. However, if your small business is still in the fledgling stages then it is time to do yet more research and investigate trends within your industry. Use Statistics Canada data https://tinyurl.com/y59pyjx9 This data will help you estimate when your high and low seasons will be and alert you to other factors that may affect your volume of sales. The advice of a financial advisor or accountant is likely to come in handy here.
5. Prepare for Emergencies
Even the most successful small businesses experience difficulties, particularly during economic downturns. It pays to have a contingency fund set aside to keep your small business safe should disaster strike.
Your contingency funds might take the form of savings, at least in part, but it is also worth knowing about finance options available to you:
- Business credit cards are suitable for short term difficulties and can help you to manage cash flow when issues such as late payments arise.
- Lines of credit provide your small business with a safety net for longer-term problems. They combine the on-demand convenience of a credit card with the attractive rates and repayment style of a bank loan.
When done right, budgeting can accelerate the growth of your small business by helping you to avoid roadblocks and potential disasters. A careful realistic budget puts you in the driver’s seat and allows you to remain in control of your finances as you work on your small business.
Bear in mind that not everything will work out exactly as you expect, and it is worth taking the time to review and adjust your budget on a regular basis.
Think of your initial budget as a rough draft: necessary, but not yet perfect.
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