It's the first of the month. Do you know where your money is? For many small business owners, the unfortunate answer is "sort of..." That's the danger of trying to run a growing operation without a proper budget.
Operating a small business already represents a precarious endeavor. According to statistics, about half of all small businesses fail within the first five years. That fact points to a disturbing bottom line: even under the best of conditions, you're facing a coin-flip with your business.
With such daunting odds, you need every advantage you can get. Creating a budget helps put you in the best possible position. As a result, knowing how to budget represents one of the keys to business success.
Don't Skip the Budgeting Process
Sure, every business should create a budget. Business 101, right?
Unfortunately, real life gets in the way. The crushing time and resource restraints that come with starting a new venture often overshadow those Business 101 lessons.
As a result, many small businesses skip the niceties of an official budget. One survey indicated that more than 60% of these operations went without a formal budget over the course of a year. That's not to say these firms don't operate with some forms of financial planning and control. But they didn't go through the formal budgeting process.
More than 60% of small businesses went without a formal budget over the course of a year.
This can happen for a number of reasons. Small businesses often don't have the support staff necessary to create a budget. Meanwhile, the owners themselves might not have the appropriate financial background.
At the same time, startup founders are often overworked and trying to achieve multiple goals at once. Under these circumstances, budgeting seems like a luxury.
Despite the time and effort necessary to develop a budget, the process itself has significant value.
How Budgeting Helps You Run Your Business
We've outlined some of the challenges small businesses face as they look to make a budget. Even with these obstacles, it's important to make time to create a formal budget. Ultimately, you'll be better off for the effort.
Think of it as an investment. The time dedicated to the budgeting process will allow you to conserve resources and to allocate funds better. Your organization will get more efficient, and you'll be able to increase your chances of success. Here are a few specific gains you’ll experience once you’ve completed your budget:
Track Spending: With a budget, you'll know better where your money is going. This will let you find places where you can cut costs without impacting output.
Gather Data About Your Business: Which of your products have the best margins? Where should you set your prices? What's your best plan for expansion? A detailed budget can help you discover these key insights.
Raise Capital: To expand, you'll need additional funds. Whether you're applying for a loan or seeking out investors, you'll need comprehensive financial information to complete the process. A formal budget can provide this.
How to Build a Budget
Here are the basic steps necessary to put together a useful budget:
1. Calculate Your Revenue: Understand where your money is coming from. This will let you know how much you have to spend. It will also provide insights into the value of your various products.
2. Figure Out Your Fixed Expenses: This category includes costs that remain the same, whatever your output. Think of expenses like rent, insurance, and certain unavoidable salaries.
3. Compute Your Variable Expenses: These outlays apply directly to production. As you increase output, these costs rise proportionally. As you cut back on your operations, these expenses fall. Raw materials and some wages count in this category.
4. Create a P/L Statement: Now that you've determined your top-line figure and your expenses, you can quantify your profit or loss. This figure will let you know how much money you have to spend on supplemental projects.
5. Set Long-Term Goals: Know where you want to go. Weigh investments that would maximize your growth. Consider initiatives such as productivity improvements, new products, or expanded marketing.
6. Prioritize Projects: You've quantified your resources and set your goals. At this point, you need to make specific funding decisions. Your budget should divvy up your resources among the projects demanding attention.
How to Improve Your Budget
So far, we’ve seen how to create a basic budget. However, you can go beyond this bare-bones model. Here are some ways you can upgrade your budgeting process and take your business to the next level:
Seek Out Additional Resources
You don't have to face the budgeting process alone. There are hundreds of software options meant to help small-business owners. Research the ones that fit your situation and let them smooth out the process.
Regularly Review Your Budget
Markets change quickly. The assumptions you made when you constructed your initial budget might evolve over time. Schedule regular budget reviews to make sure you remain on track.
Involve Other People in the Process
Talk to your key employees about your budget. Gather their opinions and try to reach a consensus about priorities. By getting additional perspectives, you increase your chances of developing the best-possible plan.
Use Your Budget to Invest in the Future
Running a small business can feel like one near-disaster after another. If you're not careful, it becomes a job dominated by emergencies. After all, you have enough trouble just keeping the day-to-day on track.
However, you didn't become an entrepreneur just to make it through the day. You want to create an organization that can endure over the long haul and grow over time. Creating a budget facilitates these goals.
You didn't become an entrepreneur just to make it through the day. You want to create an organization that can endure over the long haul and grow over time.
Budgeting early in your business's life makes it easier to launch your company. From there, mastering the budget process allows you to scale your operations as you gain market share. By documenting your finances and setting your resource-allocation goals, you can create a structure for success. This gives you a real chance of beating the odds and thriving for years to come.