For first-time business owners and even old hands, managing cash flow is one of the most challenging aspects of running a business.
But cash flow is really just a by-product of budgeting. Learn to budget and your cash flow will pretty much take care of itself.
Another thing many business owners overlook is that the same principles apply to a business budget as a household budget. Where they fall over is in the transition. Many new business owners move from earning a regular, reliable income (which makes personal budgeting easy) to a changeable and sometimes unpredictable income. Having sufficient working capital and cash flow are the two main reasons why all small business owners need to budget well.
A good budget is the foundation for business success. Budgets enable businesses to plan and grow. They help to set targets, control spending, fund growth and overcome financial obstacles – expected and unexpected. They also provide a method of tracking income and expenditure. A business without a budget is like plane without a pilot or even a black box to find out what went wrong.
Budgets can be as simple or as detailed as you need. At the bare minimum, they lay out your projected revenue and expenses for a specified timeframe – it could be monthly, quarterly or annually. Initially, your budget will be based on either on historical data if the business is established or research if it is a start-up. Over time, your data will become more reliable and accurate, which means you will be able forecast more accurately too.
When you are developing your budget, be as specific as you can. Separate fixed costs from variable costs and list out your discretionary expenses. These are also known as the fritter, and this is where small business can make real savings. Detailing them in your budget will help you to decide which items you can’t live without and which you could postpone until your business can better afford them. The more specific you are, the more transparent your finances will be.
Being accurate is not the same as being realistic. Accuracy is not always possible, whereas you can always be realistic. When it comes to sales, it’s hard to pin down the numbers. Things can look good on paper – your market potential is strong and your forecast sales are strong – but the reality can be quite different. All you can do is look at the historical data, the trends, the market and the competition, and essentially make an educated guess. The most important thing is not to get carried away with projections, and consider looking at worst and best case scenarios. Your budget will be better off is you underestimate income rather than overestimate.
It doesn’t pay to be complacent given the rate at which technology is advancing. What worked five years ago may still work today, but there may be an even better and or cheaper way of doing it now, so don’t be afraid of change. You may have to take a risk but that’s what being is business is all about. If you don’t investigate, evaluate and try, you won’t know, and you won’t be in a position to realise the potential benefits.
Of course it’s important to enjoy the rewards of hard work, and reinvesting profits into the business is a great way to encourage growth. It also pays to make sure you have sufficient working capital, and squirrel some of your profits away for contingencies.
If you are running a small business, don’t pay yourself all of the profits. Work out a fair salary and pay it regularly, and don’t be tempted to splurge if sales are higher then you expect one month. This way, you’ll be able to cover the shortfall should sales dip in subsequent months.
Even if we don’t care to admit it, we all have a tendency to spend more the more we earn. The same goes for businesses. A robust budget that is reviewed regularly will help keep spending in check, allowing your business to thrive and grow.
Build the value in your business for the day you sell your business
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