One of the biggest problems I see with most small business owners is that they are usually far too busy focusing on their core competency, or the competition to work within a budget. They drop the ball on some of the business fundamentals. For example, they think that bookkeeping and accounting can be delayed until the last minute and that they should prioritize getting their business off the ground. Unfortunately, this is one of the reasons one in five small businesses don’t even survive through their first month. And ironically, business owners usually end up spending more time and resources on business fundamentals in the end than they saved putting them off.
Here’s a tip you might not understand: What your business has in common with all other companies is just as important as what sets it apart from others. If you think that just honing your “edge” will help you create a successful business, you may need to reevaluate your strategies and business plans.
One of the “fundamentals” that every business owner should focus on is creating a budget. It might seem complicated, especially at first, but as your business matures and you have a better idea of your business’s income and expenses, you will get better at budgeting.
Startup vs. Running Business
Creating a budget and adhering to it is imperative if you want to run a successful business. But creating a budget for a startup is very different from budgeting for a company that you’ve been running for a while. The reason is simple. Even if you thoroughly study the industry you are in, your competition, and seek professional consultation, there will be unprecedented expenses when working on a startup. Every start-up should create “cash contingencies” to cover those unexpected expenses or situations.
Budgeting for a business that’s already been running for a while (ideally, more than a year) is relatively easier. You have a lot of actual data points to work on. From previous months, you’d know your sales and expense patterns. You may even be able to plan for seasonal expenses. For example, some businesses see a lot of activity in certain months, and other months are relatively slower. Differentiating between the two is crucial for successful budgeting, as it allows business owners to allocate adequate resources and (if needed) secure extra funding.
Profit First Budgeting Tips for Business Owners
The Profit First method is the best budgeting tool to help small business owners better manage their resources. The purpose of working on a budget isn’t just to quantify your expenses and to try to find organic ways to shift your bottom line. Budgeting using Profit First is also about expansion and growth. If you don’t focus on the financial aspect of growth, you are likely to incur more debt, turning your hard-won assets into “ball-n-chain” liabilities.
1. Short Term vs. Long Term
You can either create two separate budgets or create one budget that has your long-term and short-term income projections, expenses, and goals outlined. This will help you see the bigger picture and might also help you plan for expansion. For example, let’s say you are planning to revamp your office in four months, for which you may need to secure a small loan in addition to whatever you have set aside from your profits. When you see both budgets side by side, you may find that if you tighten your short-term budget (monthly) a bit and push the renovation plans to six months instead of four, you may not need the loan, and you can raise the required capital on your own.
Short-term budgets may also refer to financial emergency plans. If you are facing a cash-flow crunch (like many businesses saw during COVID-19), routine budgeting can’t help your business get through. In times like these, it’s better if you stop following your usual budget, and create a new budget that resonates with the current financial situation.
2. Be Vague But Detailed
It seems like a contradiction, and it is, but this is one of the keys to proper budgeting. In many cases, you can’t micromanage every little aspect of your budgeting. Even if you have years of income and expense data on your hands, it’s not a good idea to be too specific in funds allocation. Let’s say you have a pattern for meeting with your clients for lunch two days a week. You know what you usually eat, and you have a relatively accurate idea of what your clients like to eat, so you may be able to allocate a budget for every week’s client’s meeting.
That’s not necessarily a good idea. If you lump it together with your other outside expenses, like gas and coffee, you will have more freedom. But at the same time, if you want to cut costs, these details are essential.
A good middle ground is to give yourself a little leeway and keep some expenses vague. In the book, Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine, Mike explains how he uses his “Petty Cash” account:
“Set up a bank account and get a debit card for petty cash purchases, such as client lunches. Then allocate a regular dollar amount from your OPERATING EXPENSES account to petty cash. Me? I allocate $100 every two weeks for myself, and also for a few employees who need it. The funds cover gifts, lunches, and other small purchases. Sorry— if I’m buying, we likely aren’t having an eight-course meal. If it’s not in my PETTY CASH account, it ain’t in my budget.”
Set a goal to save a little amount for these expenses every month. It can be a dollar amount or a percentage. It will ensure that you have enough, but still watching your spending.
3. Understand All The Elements
That’s something that comes to you with time, but you can expedite its pace with research. You can’t account for every possible expense when running a business, because there are always erratic and unplanned expenses. But the more elements you take into account, the more accurate you can be with your budget.
You can always start by listing your fixed expenses. Fixed expenses are the same amount each month. These bills cannot easily be changed and are usually paid on a regular basis, such as weekly, monthly, quarterly, or from year to year, and include costs for rent, mortgage payments, salaries, utilities, insurance, property taxes, equipment leases, and advertising. These expenses are typically the biggest part of your budget.
4. Be Conservative About Revenue And Overestimate Expenses
One way to create a relatively risk-free budget is to be conservative about your revenue and overestimate your expenses. For example, if you are projecting your next month’s revenue based on the performance of the last three months, there are multiple ways of doing it. If the revenue increases were in progression (increasing from the first month to the third), the chances are that you will exceed your last month’s gain. But a conservative approach would either be to take an average of three months revenue, use the median, or just go with the least revenue month. With less spending, you will automatically look for ways to cut costs.
As for expenses, it’s always best to build in a contingency fund. It will ensure that you always have enough funds on hand – as in the case of the pandemic. Just as it is with being conservative about revenue, this will push you to be more careful with your spending. If you overestimate your costs and expenses, you will always focus on the most important ones first, and you will be forced to cut down on discretionary spending.
5. Leverage Technology
There is nothing like sitting down with a pen, paper, and a calculator when you have to reconcile numbers in your head. But while accounting software and budgeting apps might seem boring, they are also detailed and efficient. And they will account for many things that slip through the cracks if you are budgeting manually.
One of the key benefits I found in using accounting software or apps is that they teach you about variables that you might not even have thought of. And their custom tools help you insert expenses specific to your business. The more elements you can account for in your budgeting, the more accurate your estimation will be. It’s also beneficial from a cost-cutting initiative because when you are looking at the big picture without missing any of the nuances, you can easily differentiate between crucial expenses and the ones your business can get by without.
6. Keep Updating And Improving
Even if you have a very steady business, with highly predictable revenue and expenses, it’s a good idea to try and improve your profit first budget at least every quarter. Even if there are small changes from your previous quarter’s projection, it’s imperative to see whether they are in the right direction. If your revenue is going down and expenses are going up at regular intervals, you need to know and use budgeting to turn things around. But if you keep sticking to the same budget for months (or even years), you might stifle your chances for growth.
A predictable business, accurate budgeting, and strong cash flows might make it very easy for you to have available funds for your business without an outside source of funding when your want to expand your business.
Profit First budgeting can help small businesses overcome their financial challenges. If a business owner understands what their expenses are and understand the revenue flow, they can strike the right balance between the two. One of the principles of financial discipline is that for long-term profitability, it’s more important to spend within your means, than striving for more sales to cover your expenses. Because if you are in the habit of spending first and finding money for it later, your small business will never become truly profitable, no matter how rapidly your sales numbers grow.
Do you have titanic-sized goals but no clue how to get them out of your head and into your life?
Want to know why “doing everything yourself” and micromanaging financial details in your head stops your ability to up-level your business and, therefore, your lifestyle?
When you try to save money by doing your own bookkeeping or delegating it to an employee, you’re squandering valuable time and energy that is better used growing your business.
By outsourcing your bookkeeping to Bookkeeping21, you learn the essential, must-know difference between business change and business growth – and why it matters to your overall goal-setting strategy.
Don’t let overwhelm or procrastination hold you back from starting your journey to financial freedom. Book a Call with Suze today!