Whether you’re launching a startup or planning for growth, having a smart budgeting process is essential.
Whether you’ve purchased or opened your own business, creating a budget is a crucial first step to success. You are great at what you do, but budgeting isn’t usually at the top of a business owner’s skill set. Most have a general idea of what it takes to be profitable, but it can be hard to put pencil to paper or numbers into a spreadsheet initially.
Many estimates are involved, but the most important is knowing that there will be enough money to operate and generate income by matching future expenses to future revenue. The balancing act entails not only not spending more than you make, but also planning to spend enough to grow your business.
Starting the budgeting process
A business owner will probably have expenses specific to his or her product or service, but general expenses are usually the same for every business. Rent or mortgage payments are among the most significant fixed expenses other than paying employees. Other ordinary expenses will be payroll, monthly utility bills, tax payments and the expenses for raw goods that go into your product. Account for these before all else.
Balancing expenses requires growth and sales estimates. Ask yourself how fast you expect to grow. Research competitors and industry averages for new businesses to see what growth looks like for them.
Now, being able to match revenues against expenses, you can run different scenarios, estimate cash flow and know how much income can go towards growth and marketing. Most importantly, you now have an estimate of what your profit will look like when it is all said and done.
Once that’s all done, here are five tips to make the budgeting process simpler and more impactful.
1. Put it in a spreadsheet
A spreadsheet can be one of the most potent tools to craft a budget. Properly created, it is an easy way to change scenarios and nail down specific goals and operating methods. It is easy to see percentages of fixed and variable expenses with a spreadsheet, and changing a number here or there can tell you what happens if you add a product or employee.
2. Cut your costs
You can’t start cutting costs until you know them. Now that costs are estimated or known and in your spreadsheet, start playing around with what happens if a cost can be reduced or cut entirely. If purchases are anticipated, you might determine that some can be delayed a bit. It’s amazing how different your bottom line will look when you find just a few areas to trim.
3. Put slack in the budget
Entrepreneurs don’t go into a business because they feel it might do fine. They go into a business because they expect it will do great. While great is the expectation, the budget needs to reflect fine. It can be challenging to do with a business you’re excited about, but planning for the worst is the best way to realize the amazing. Have extra savings in the budget for a rainy day and plan on scenarios where costs might be higher than expected and revenue lower. The main idea to keep in mind here is preparing for a high amount of savings and lackluster performance to create a lot of financial slack. Well, that and the surest path to happiness is reduced expectations. Now go blow it out of the water.
4. Plan on regular budget reviews
A budget is no good if it is created and never looked at again. Unfortunately, this happens with many business owners. Reviewing what was planned against actual results can refocus you on where to cut costs or where to grow sales. Additionally, it’s not enough to just compare; that budget is also there to continue to tweak how you are doing business. Feel free to copy it into another page on your spreadsheet to modify costs and profits that fit historical performance and then keep running new scenarios. Knowing where the business has been, comparing it against what was planned and properly anticipating for the future are the most excellent tools you have for continued success and income growth.
5. Hire a pro
Hiring a pro can be worth every dime. Because pros have worked with many businesses and their bookkeeping and budgeting, they have the experience necessary to compare against other successful companies, probably in your same market segment. Fractional CFOs are inexpensive as their utilization fits only what your small business needs and can offer invaluable insight.
Budgeting is everything in business
Budgeting becomes easy for every entrepreneur in short order, and all it takes is jumping in the first time and then continuing its use. Monthly reviews are a must for business owners and the surest way to control costs and grow profits. Feelings are great, but numbers are ten times better.
Entrepreneur Leadership Network Contributor