By Larry Alton
Small business owners are no strangers to cash flow problems. Money is notoriously tight, and conserving wherever possible could mean the difference between staying in business and joining the 50 percent of small businesses that go out of business within five years of opening their doors (PDF).
While many small business owners have a budget, most don't know how to maximize this resource. Successful small business budgeting begins by identifying profit margins, and then wisely allocating expenses where you need them most.
If you struggle with instituting a budget or you simply need a quick refresher, these 11 small business budgeting tips can help you get—and stay—on track. After you read these tips, be sure to check out our article on how you can Save Money with Budgeting Software.
Small Business Tips: Budgeting 101
1. Budget by Department
Even though your business might be small, you could still benefit from splitting the budget into several categories. For example, you might begin by budgeting for IT expenses. From there, you could move on to advertising, labor, and other areas of your business. This will help to keep your spending localized and, at the same time, give employees in charge of each category a little more responsibility.
2. Overestimate Expenses
Always round up in your small business budgeting. It's much easier to account for underspending than overspending. This also lessens the blow to your finances when you overspend.
3. Analyze All Business Purchases
Many business owners keep a close eye on their large expenditures, but they don't pay much attention to the smaller ones. This could be a costly mistake, since those small expenses quickly add up and turn into a big expense. It's important to pay attention to every bill that comes through to ensure that you're not spending even a few dollars on frivolous items.
4. Create Realistic Cash Flow Projections
Most of your small business budgeting effort will revolve around cash flow projections instead of actual cash flow. It's very important to be realistic with this number. Overestimating your cash flow won't give you anything but false hope and a huge mess to clean up later.
5. Update Your Small Business Budget Every Month
This may seem like a no-brainer, but it's a good reminder that you can't make a budget once and then never look at it again. Update your small business budget every month with new cash flow projections and realistic spending categories.
6. Incentivize Your Employees
Sticking to a budget is a big battle for small businesses, and sometimes tying incentives to meeting your budget—in the form of performance bonuses—is a great way to promote staying on track. Don't have any employees? Then award yourself with a performance bonus when you meet your budget goals.
7. Scare Yourself
In addition to the performance-bonus carrot, use a stick to motivate yourself. Seriously analyze the risks you face if you don't adhere to a solid budget. Include debt-to-profit ratios, not making payments, and missing payroll. Looking at the risks associated with not following your small business budget can sufficiently convince you to stay on track.
8. Anticipate and Plan for Big Expenses
Any time you know there's a big expense in your future, plan accordingly. Do your best to anticipate these expenses and save for them along the way to minimize their effect on your bottom line.
9. Identify Essential and Non-Essential Expenses
Things such as payroll, taxes, rent, and mortgage payments are considered your essential expenses. You must pay these bills or risk going out of business. Compare these to commodity expenses you don't really need to operate a business, such as certain supplies and equipment, free-donut Fridays, and office renovations. It's OK to splurge on commodities once in a while, but when money is tight, know the difference between what you need and what you can live without.
10. Target Small Business Debt
Debt hangs over your head accumulating interest until you pay it off. When you create your budget, look for any extra money that you can put toward paying off your debt more quickly.
11. Reserve Some Profits
If you always spend your profits as quickly as they come in, you'll never have enough to pay for unexpected contingencies or losses. You'll also have a hard time growing your business when the timing is right. All of these things take excess capital, and reserving some of your profits in a dedicated savings account is one of the smartest things you can do.
Ultimately, the best advice for small business budgeting is to simply sit down and get started. Every company will have its own techniques for allocating business spending, and good budgeting techniques can help you achieve both the expansion and theh comfort you seek in your business structure.
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