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Smart budgeting is one of the most crucial indicators of small business success. Determining where funds must be allocated and where they must be cut creates the entire blueprint for growth. It isn’t easy, but there is a very simple, very sobering trick to good budgeting: plan for the worst. The worst will rarely happen, but your budget should be able to support you through a worst-case scenario. That’s how strong business owners persevere through hard times and accumulate capital during prosperous times.
Many new business owners feel anxious and inexperienced when it comes to managing money, but in truth, we’re all pretty experienced with this. Your personal finances have served as practice for budgeting for your business. You might manage a car loan and mortgage or rent payments, along with grocery bills and a variety of other expenses. If you’ve done this considerably well with few mistakes, be confident that you can operate from a business budget with the same level of efficiency.
Know what you earn
The first step to proper budgeting is having a system in place for analysis. You can’t manage what you don’t know about. So whether you use financial software, an accountant or another method to keep track of your finances, make sure you can clearly discern all of your income sources. Know how much money comes from each source and how regularly it comes. Without this information, you simply can’t create an accurate budget.
Know what you owe
The next, equally simple step to budgeting is compiling a list of all fixed expenses. This varies depending on the kind of business you run, but it often includes utilities, website fees, employee salaries, shipping costs, app/software payments, etc. Essentially, anything that counts as a recurring, mostly predictable expense.
While some of these figures will never be completely fixed (i.e. utilities vary a bit each month), the important part is that you have estimates. This creates some stability and knowledge of what to expect.
Know your profit margin
Your profit margin is the portion of your revenue that counts as profit. Once you or your CFO calculates the current profit margin, you can begin monitoring it. The power in knowing your profit margin is that you can work to gradually increase it over time. To do this, you need to figure out your Key Performances Indicators (KPIs). They are the primary factors that influence whether or not your business performs well. Hundreds of different things can come into play when considering KPIs, such as customer loyalty or monthly online sales. It’s best to work with a CFO to pinpoint your most critical KPIs.
Once you have reliable figures for both income streams, regular expenses and profit margins, you can proceed to fine tune your budget and set some rules.
As with personal budgeting, business budgeting works best with strategy and discipline. The better you plan and the more informed you are about your finances, the more insight you have to make wise decisions. For example, your personal budget may include X dollars per month for groceries, which you don’t allow yourself to exceed. Once you test this and conclude that you are not going hungry (or overeating), you can develop a routine and stick with this figure each month.
The same goes for business. You first must determine that your budget is reasonable and produces desired results. For example, X dollars per month helps generate leads and market a new product online. Then you can stick to that figure and only adjust it when the need for change arises.
Especially important for new business owners, frugality is an art that you must get acquainted with. Essentially, it means that no money is spent unnecessarily or without a major purpose in mind. For every move you make, you want it to lead you to something of value such as more sales or more exposure. If it doesn’t, then you can’t justify budgeting for it.
One of the biggest killers of frugality is moving too fast. For example, a new entrepreneur might purchase office space at $400 a month doing all the same tasks he/she could do from home for the first few years. Shelling out additional money each month for expenses that are optional is money down the drain. Being frugal, on the other hand, helps you build capital and eventually make useful investments that bring your business to the next level.
Takeaways for your startup budget
If this seems like a lot to take in, remember that feeling overwhelmed is just part of the process, and that will change. Budgeting becomes easier the more you do it and your estimates become more reliable. With a lean budget in place, you can guide your business without being plagued by uncertainty. It will provide a framework from which to work and make decisions with greater clarity.