Creating a realistic budget is one of the best ways to protect your business during periods of difficulty and keep it running smoothly in spite of setbacks. A budget gives you more control over the financial health of your business, allowing you to manage cash flow, create spending caps and set realistic targets. The businesses that succeed are the ones that prepare and adapt when necessary, so smart budgeting is really non-negotiable. Here are five useful budgeting tactics that you can use to help your business survive, grow and flourish.
1. Calculate Your Costs
The first step towards creating a realistic budget is calculating your expenditure. This step forms the basis for the rest of your budget, so it’s important to be as accurate as possible. Meticulous bookkeeping is enormously helpful for this, but if your business is new, you’ll 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, direct labour and energy are examples of variable costs.
You’ll also have to factor in marketing, advertising and legal expenses; these can quickly grow out of control so it could be wise to double your estimate, just to be on the safe side.
If possible, have your business partner or accountant look over your estimation. A second pair of eyes is always helpful and they may be able to point out things you’ve 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, don’t skip this step. It’s 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 company and motivate staff to work harder, whilst 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’re actually making. It’s important to calculate this figure regularly and keep track of your progress so that you can understand whether or not your 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’s a great sign. If it’s 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 business. Expansion, seasonal trends and economic conditions can all impact your cash flow. It’s important to have an idea of how much money you’ll 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’ve 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 business is still in the fledgling stages then it’s time to do yet more research and look into trends within your particular industry. This should be able to tell you 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 businesses experience difficulties, particularly during economic downturns. It pays to have a contingency fund set aside to keep your business safe should disaster strike.
Your contingency funds might take the form of savings, at least in part, but it’s 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 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 business by helping you to avoid roadblocks and potential disasters. A careful budget puts you in the driver’s seat and allows you to remain in control of your finances as you work on your business.
Bear in mind that not everything will work out exactly as you expect and it’s 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.