Budgets are important for keeping anyone’s financial on track and Small business owners know this better than anyone. They are running and building a business on a relatively small budget, which is why conserving money is crucial for them to cover their startup costs and stay in business.
These smart budgeting tips for small business owners will help you ensure your business’ financial health.
Lack of a budget is the largest reason that businesses fail. In fact, Forbes reported that 80% of businesses fail their 18 months due to lack of operating capital. Smart budgeting helps ensure that you will have the money to cover unexpected business costs and keep your business running smoothly.
1. Prepare for Unexpected Expenses
Fixed costs are easy for a business to budget for. You are able to estimate how much your utilities, rent, and other fixed costs will be each month. The problem for the majority of small business owners are unexpected expenses. You can cover these costs by creating and funding an emergency fund. To do this, you should take a percentage of your profits each month and put them away into an account that is only used for unexpected business expenses.
2. Create A Risk Analysis
Every business faces risks. These come from several places. Some industries – such as payday loan companies – have a high expected loss factor. Other potential risk comes from nature itself. If you live in an area that is prone to flooding, tornadoes, or other natural disasters then you need to consider that risk also.
A risk analysis looks at all the potential pitfalls for your business and ranks them based upon their likelihood, and potential cost. This gives you a starting point for deciding how big your business’s emergency fund needs to be.
3. Overestimate Your Operating Costs
Many companies receive income on a per project basis. This means that they need to put out money to fund things like materials, vendor orders, and payroll before they get any income. Underestimating these costs can easily cost your business to not have the operating funds to complete a project. When you are bidding or estimating how much a project will cost overestimate. It is better to get more profit from a project then be looking for funds to get it completed.
4. Track Your Income Cycles
Sales will ebb and flow throughout the year. It is important to track your sales cycle. This allows you to estimate when you will have income coming in and when you will need money to cover the slow times. You can then budget to have enough operating funds to get you through the slow times and into the profitable times.
Your budget is a changing document especially if you are running a new business. If you create a risk analysis, overestimate your operating costs, track your income cycles, and fund an emergency fund then you will help ensure the future financial health of your business. You also will give yourself a few less grey hairs and sleepless nights. As you make your next budget, make sure to keep these Smart budgeting tips for small business owners in mind.