Small Business Funding: Creating and Maintaining Your Company’s Budget
A shocking 80% of new businesses fail within the first year and a half.
The reasons are numerous, including misunderstanding your customers, leadership breakdown, and a bad budget.
When it comes to small business funding, a proper budget is necessary, but all the information available on the internet can be overwhelming and difficult to digest.
If you’re looking for an easy-to-understand guide on how to budget your small business, then look no further.
Keep reading to discover 8 things to consider when creating and maintaining your company’s budget.
Add Up Your Expenses
First things first. In order to properly budget, you’ll have to create a master list of all your expenses. There are two main types of costs: fixed costs and variable costs.
Fixed costs are the costs that remain the same week-to-week or month-to-month. This includes rent, internet, paying salaried employees, and accounting fees.
Variable costs are a bit more difficult to plan for because they can be constantly changing. This includes paying hourly employees and buying supplies.
If you’ve already been in business for a little while, this is easier. You can use the data from the previous months or years to accurately budget for costs.
If you’re just starting your business, your best friend will be research. See what others in similar situations are spending. Always try to overestimate the costs you’ll incur because underestimating costs can be detrimental.
And don’t forget to include start-up costs as well.
Project Your Sales
Now that you know your expected costs, it’s time to figure out your projected sales.
Much like with your costs, it can be hard to plan for your sales before you’ve started your business. So, research, research, research! The more real information you can base your budget on, the better.
You’ll want to overestimate when planning your expenses, but underestimate when planning your sales. The reason why is very similar: if you overestimate your sales, then you might find yourself short on money.
So, it’s better to plan for low profits and be pleasantly surprised if you make more than expected.
Expect the Unexpected
Every business will incur some unexpected expenses. Slow seasons, theft, lawsuits, and customers who can’t foot your bill are all examples of some unexpected expenses you might run into.
When you don’t have a large cash flow to play with, even petty theft can severely hurt your profits.
So, how can you plan for this? Well, unfortunately, it can be impossible to list every problem that could happen. All you can do is research your industry and see what unexpected expenses others have dealt with.
When you’ve compiled your list, try to put a reasonable amount of money aside for these situations. Of course, it’s unrealistic to have enough money to cover every negative situation that could happen, but you can create a buffer in your budget to at least help lessen the blow.
Identify Your Gross Profit Margin
When getting involved in small business funding, you’ll probably hear a lot about gross profit margins. Your gross profit margin is the money you have leftover after all your costs are accounted for and all your bills are paid.
Sounds simple enough to calculate, right? Where some business owners go wrong is that they get excited looking at their sales and forget to take into consideration every single cost. Your variable costs or one-time costs might easily slip through the cracks, so don’t forget to include them along with your fixed costs.
When you work on your budget, you should be sure to keep track of your gross profit margin and regularly compare the two. Otherwise, you could be fooled into thinking you’re making money when you’re actually losing money.
Your gross profit margin goal can be used to help decide your budget by helping you figure out how much you should charge for your products or how much you should spend and still make a profit at the end of the month.
Budget for an Occasional Negative Cash Flow
Gross profit margins and cash flow are sometimes confused. Remember, gross profit is the leftover money you have after all your costs. Cash flow, which is equally important in small business funding, focuses on how much money is coming in and out of your business on a month-to-month basis.
It’s also the reason why you should consider budgeting for savings.
Let’s look at an example. You run a restaurant. Summer is your busy season. You have a good cash flow since customers are constantly coming into your restaurant. You are bringing in enough money to pay your bills, plus some!
Now, it’s winter, and it’s the slow season. January was particularly slow, and you didn’t make enough money in that month alone to pay your bills. You have a negative cash flow this month.
So, how do you stay in business? Well, you can still have a successful business and have a negative cash flow at times. Remember how busy summer was? You could use some of the extra money you made those months to cover your bills and still end up with a profit at the end of the year.
Of course, your business can’t survive if this constantly happens, but you can survive for the occasional negative cash flow if you budgeted and planned correctly. Set some money aside in your budget to make up for a few months of negative cash flow so your small business funding won’t suffer.
You can’t just spend money – you have to spend smartly while focusing on your small business funding.
So, what is spending smartly? Basically, it’s spending money on things that will help your business grow. Instead of spending large sums of money on a fancy coffee maker or brand-new office furniture, consider reallocating that money towards things like advertising or brand marketing.
When prioritizing your spending, you should also consider investing in yourself and your employees. Paying a little extra for employee training or learning about management techniques could go a long way in growing your business.
Remember to identify and cut your non-essential expenses. Anything that won’t help you make money or grow your business should be placed on a list of possible expenses to cut if you have to.
Shop Around For Suppliers
Building relationships with your suppliers is important, but your profit margin is probably going to be razor thin at the beginning of your business venture.
Since you’ll be spending a large sum of money on your suppliers each month, it’s important to take your time and shop around for the best prices before settling on a supplier.
Remember when we talked about prioritizing your spending? While you shouldn’t lower the priority of the supplies you need to create your product, you can cut spending on some office supplies.
Are you making jewelry? Keep your budget for your diamond supplier high, but consider cutting the budget for your office supplier. High-quality diamonds are important, but you probably don’t need to spend extra money on name brand pens over generic pens.
Additionally, don’t be afraid to negotiate with your suppliers – both with costs and payment plans. Small business funding can be difficult to navigate, so it’s always helpful to try and get all the discounts you can.
Don’t Be Afraid to Adjust
So, you’ve added up your potential costs and profits. You’ve taken the time to prioritize your spending and consider unexpected costs. You’re finally able to sit down and write your budget!
You might think that it’s a one-time project, but it’s important to regularly re-evaluate your budget. One big pitfall some new businesses encounter is not closely following their budget. They simply file it away unless they find themselves in some real financial trouble.
Upon opening your business and navigating your small business funding, you should be sure to keep track of your spending and profits and constantly compare them to your original budget. The same is true before you open your business, too.
If you do some more research or talk to someone in the business and think that your budget may be askew, then, by all means, adjust your budget. It’s better to update your budget and keep track of where your spending should be than to ignore it because it’s out-of-date.
The Importance of Budgets in Small Business Funding
Budgets can be one of the most overwhelming parts of preparing to start your new business, but they’re incredibly important in small business funding.
There’s a lot to consider when setting up your budget, and it’s vital that they’re accurate. If not, you could find your company, or yourself, bankrupt before the first year is up.
But remember, setting up a budget isn’t the only thing you have to consider. Pleases view our pricing page to see how we can help with your small business today.