Business Budgeting 101: Tips From the ProsPosted by Factor Funding Co. on October 13, 2016
Many small business owners feel that they don’t have time to learn proper business budgeting. Indeed, becoming a budgeting expert is incredibly difficult. It can be simpler, however, if business owners read the following pieces of advice from other successful operations.
Why All Businesses Need to Budget
Before talking about tips to make budgeting easier, let’s address why it’s important for small business to know how to budget. Having a budget enables an owner to predict whether the enterprise will generate enough revenue to afford its expenditures, grow, and even pay the owner. Budgeting stops an owner from spending more than the business is making, and it ensures that he or she is spending enough to keep the business competitive.
Budgeting for an established enterprise enables its owner to predict future revenue based on past trends and growth information. In contrast, a startup must budget after researching areas of operation, working hours, number of anticipated employees, facilities and inventory, competitors, and more.
Either way, once an owner has an estimate of the business’ expected revenue, he or she knows what the business can afford to spend. Determining overhead by combining things like utilities, payroll, and materials, and then subtracting that number from the total revenue, allows the owner to predict if the business will have a fund deficit or a surplus. He or she can then plan as needed.
Tips for Budgeting Successfully
Knowing why to budget is important, but knowing how to is essential. Follow these tips to make budgeting an easier process—one that any small business owner should be able to do.
- Research standards for the industry. Every industry has its own profit and cost expectations. Even though no two companies within the same industry will have the exact same budget, looking at what similar businesses make and spend can help predict a budget.
- Create a beginning spreadsheet. Before starting a business, the prospective owner should create a spreadsheet to determine what he or she will likely spend on overhead costs. Contacting potential material suppliers and determining potential taxes, utilities, etc. is essential when completing the spreadsheet.
- Add some slack. It’s always best to add some slack to the predicted overhead. This creates a safety net should costs run a little higher than expected. Resist temptation to later reallocate this money; it was set aside for a reason.
- Know how and where to cut costs. A business owner should always have an idea of how he or she can acquire a little extra leeway if needed. Knowing what how to cut costs can allow the owner to pay an unexpectedly high bill or seize an opportunity.
- Take advantage of supplier and creditor terms. Another way to save money is to watch for beneficial payment terms offered by suppliers and creditors. This could enable a business to secure extra capital for expansion or to pay for unexpected occurrences.
- Make frequent reviews. Some businesses are content to only adjust their budgets on a yearly basis. Plenty can change in that amount of time, however, and companies should review their budgets more frequently. Smaller businesses, which are more vulnerable to market fluctuations, should plan only a month or two in advance.
- Pick the right tools. Budgeting can be made much easier with the right tools. While simple pen and paper accounting can work, accounting software such as QuickBooks or Xero eases the process considerably. Such software may have tools to perform other tasks, such as payroll processing or tax preparation.
All businesses, no matter their size, can benefit from budgeting. While learning to budget can seem daunting, the tips above make it a more manageable, helpful process.