Starting your first business, or trying to get a struggling business back on track, is overwhelming. Opinions are free, but you need solid advice to navigate the challenging days ahead.
Operating a successful business is very rewarding, but how do you get there? The most important first step is creating a budget before you make any other plans for your business.
A budget is a firm foundation for building any business. It is the blueprint to construct success. To create a budget, list out your expenses and compare them to your expected revenue if you are currently operating. If you are making a business plan for a future enterprise, start with a profit goal and calculate the investment you’ll need to reach it.
You will need to account for overhead costs, such as rent, utilities, inventory, labor, debt payments and taxes. Use last year’s figures or do market research to gather the information you need.
It is important to stay on top of your outstanding invoices and follow up with customers regularly once you are in business. Set expectations by discussing penalties for late payments at the start. Establish collection procedures so when the time comes to reach out to a customer, you and the client will how to get things back on track.
Eighty-two percent of businesses fail due to cash-flow problems, according to US Bank. A budget will help you see where your money is going. A good budget will identify your fixed income and regular expenses.
Income can include sales, savings, investment income and rental income. Expenses will include rent, loan payments, utilities, operational costs, supply costs, fees, tax payments, labor and more. It is important when creating a budget that you plan for variable expenses.
Once you have determined your budget, look for ways to cut back spending. You can contact creditors and vendors to negotiate terms and service fees. Watch labor and inventory costs closely and make adjustments quickly.
According to Infoentrepreneurs.org, a budget gives you confidence and a foundation for making financial decisions. You will be able to manage your money and resources, as well as anticipate problems so you can improve. A budget keeps you focused.
The expenses you trim will vary for each business type. However, most businesses can reduce their marketing budget. If you currently, or plan to, outsource your marketing materials, look at ways you can create your own ads and flyers. Also, review any unnecessary subscriptions or membership fees. Wait to join networking groups with fees, and instead look for free networking events to get started.
Pay invoices early to your vendors. You will avoid costly late fees, higher interest rates and may even score a discount for early payments. Having a good payment history will help you build good credit and a solid reputation.
Eliminating rent or a mortgage can free up a large amount of capital. Consider this option by taking a look at your business model, especially in the planning stages. Do you really need a storefront or office? Many companies can be operated without a physical location. Online sales and service-based businesses may not need a brick-and-mortar office to get started and be profitable.
If you are just starting your business, keep your personal and business finances separate. As a small business owner, it can be tempting to use personal funds when you are short on the business side, and later use business funds to take care of personal needs. However, this can create a complicated situation should the business fail or get audited.
Make sure you have a strong understanding of your financial health. Keep business and personal accounts separate, with balance sheets and accounting ledgers for each. This allows you to have a clear view of where your money is going each month.
As the business owner, you need to pay yourself a salary. To do this, figure out how much you need to live. Once you have determined your living expenses, you will know how much you have to earn, at minimum, to stay afloat.
Making a great impression on potential clients and customers is vital, but be wary of putting on too big of a show. Be smart about initial costs and about what you must have versus “nice-to-haves.” Keep a list of future purchases you’d like to make to improve your business’ appearance. If you are conservative with your early purchases, you stand a better chance of creating a sustainable business.
Finally, seek professional help. A good financial planner will help you assess your personal risks and areas of opportunity for a new business. You need wise counsel as you navigate your first years as a small business owner, so seek out a true partner for advice.
Contract and the Slow Season
How can I make money during the slow season?
A seasonal business, or one which relies on contract work, has unique challenges in creating a working budget. Cash flow peaks and ebbs with the weather and the time of year. Trying to navigate the financial waters can be daunting, but with a solid plan, you can have a successful business year round.
During the slow months, look at ways to downsize your staff. This may mean getting creative with schedules, offering unpaid time off to your team or using a staffing service. By offering part-time or rotating schedules, you may be able to keep your staff without a layoff.
Look ahead during busy season to the lean days ahead. Put aside a percentage of surplus profits to keep your business running during slower times. By looking back at previous years, you can see trends and forecast expectations for the coming months.
Use spreadsheets to track sales, supply orders and labor to gather the information you need.
Create off-season demand to keep sales active. Offer deals, sell your goods online or work with area businesses to create unique partnerships. Consider adding products or services to keep you relevant during the slow season. For example, a lawn and landscaping company may offer tree limb, yard waste or snow removal services during the winter to stay busy and profitable.
If you are a contract business, budgeting is required. You need to keep expenses on track to meet your commitment to the client. If you overspend on a lump-sum contract, you will lose money. If you don’t manage costs on a cost-plus-fee contract, the client will become upset at the increasing project cost and refuse to work with you again.
Create a contingency fund by holding back five to ten percent of the project capital. When you are paid for a project in advance, spend only what you need to. Break down how much to spend on labor and materials for each stage of the project. To figure out what your basic project budget will be, Indinero.com advises you to review:
- Insurance and taxes
- Inventory and machinery
Monitor your daily and weekly expenses. You will immediately spot cost overruns and make responsive cuts. Common issues which increase your expenses are:<
- Labor shortages
- Material shortages
- Weather delays
- Changes in project direction
Tracking the project as it progresses is very important. If your timeline is extended, you will need to cut back on daily operating costs to stay on budget. Your project should be planned down to the smallest supplies. Stick to the estimate to keep your clients happy.
What to Avoid
Basic Budget Mistakes
Allbusiness.com has a great list for you:
- Beware of setting your sales projections too high.
- Watch your cost estimations. Don’t underestimate to look good on paper.
- Be sure you are using your budget because not using it will cost you – big.
- By not tracking spending and income, you are setting yourself up to fail.
- Don’t overthink it – keep your system simple to use and understand.
- Pay your taxes! Failing to budget for taxes can create bigger troubles.
- Take your time and create the right budget system for you.
There are other financial pitfalls you will want to avoid as you work towards building a successful budget for your business. Credit cards, loans with personal collateral, business debt and surplus can derail your business and create financial chaos.
Business Credit Card Warnings
Business credit cards are popular tools to keep cash flowing and cover unexpected expenses. However, there are several reasons why a business credit card can cause more problems than they are worth. A business credit card offers no purchase protection and requires additional insurance to protect you.
Giving employees access to the card creates an opportunity for staff to misuse the account. It is important to set clear guidelines and monitor all charges daily. High fees and variable interest rates are reasons to avoid credit cards altogether. As a holder of the business credit card, you are personally liable for all charges. Finally, relying on credit is a sign of poor cash flow.
Personal Assets Shouldn’t Be Business Security
In the past, business loans were easier to get approved through lending banks. However, things changed after the Great Recession. Most lenders now require collateral. For some small business owners, especially when starting out, personal collateral may be all they have to secure a business loan. And many banks are willing to use personal assets to back up a business loan. However, using personal property or other assets is extremely risky.
The bank will require collateral with a high-value, such as a home or other property. If you do not meet the terms of your contract or fail to make payments, your personal property will be taken by the lender. Tough times are hard enough when losing your business, but losing your home as well is far worse.
Your personal credit score will be affected if you use personal collateral for a business loan. To protect yourself, it is best to keep personal and business finances separate.
Although many businesses are started with loans or depend on credit cards to operate, Dave Ramsey suggests a debt-free business model. During the Great Recession, debt-free businesses survived and even expanded when their competitors were closing their doors. That alone is an incentive to start and keep a business without borrowing money. So how can you do it?
Dave says, “most businesses are started with less than $5,000.” With diligent savings, you could postpone your opening to allow you to save the funds to start a business without a loan. Postponing will give you a better chance of success if you can avoid debt.
You don’t need a credit card to buy supplies or pay for business trips. A debit card is accepted for online purchases as well as for car rentals or hotel reservations. Although rewards programs are not as popular with banks as they are with credit card companies, some financial institutions like SunTrust and Bank of America offer programs for their customers.
Other tips to lower operating costs include:
- Rent your storefront or equipment until you can own it.
- Outsource where you can to save money.
- Buy used furniture and equipment to start.
- Pay cash – for everything. Negotiations are possible with cash in hand.
- Make a game plan to get out of debt, and include a plan to pay cash for upcoming purchases.
Handling Surplus The Right Way
During the Great Recession, many businesses were faced with a quick halt in consumer buying, creating a high surplus of inventory and staff. It is important to manage your inventory and staff size through busy and slow periods.
The Balance Careers suggests the following strategies to avoid layoffs when financial times are tough. One of the best ways to avoid laying off your own employees is to stop hiring new ones with a hiring freeze. At the same time, it may be smart to freeze any increases in salaries or benefits. If deeper cuts are required, consider voluntary layoffs or early retirement options. As employees quit, instead of hiring replacements, move your current employees to open jobs and train them as needed. By cutting work schedules, or offering unpaid furloughs, you will reduce labor costs but keep most of your staff. Finally, consider reducing pay rates to keep employees working instead of cutting jobs.
Surplus labor is not the only challenge which businesses face when budgets are not being met. Having excess inventory will tie up your cash flow and restrict your capital. In order to avoid too much inventory, you will need to scrutinize each item in each of your stores. If your materials are more than you need right now, you have purchased too much too early. This limits the capital you can use for other needs or projects. Assess each item category and determine where your biggest problems lie.
Most businesses create surplus inventory in common ways. If you are using forecasted quantities, but not tracking your actual need and making adjustments, you may not only be ordering too much, but you may be ignoring changes in dates for shipment. When you order too early or when a vendor sends out a shipment early, this ties up needed space in your stockroom and your budget. Determine which factor or factors are causing your inventory to bulge.
When you have figured out why you have too much on hand, make the changes needed to avoid surplus in the future. You may need to create new processes, check-ins or oversight. Dismissing employees who have neglected managing these issues and created losses for the company may be necessary. Do what you need to do to get back on track quickly.
In the meantime, here are some ways to deal with the extra inventory you have now so you can get capital flowing again:
- Request a credit from the supplier
- Sell inventory to businesses or customers
- Trade items for needed supplies
- Hold an auction to the public
- Reuse or recycle
- Scrap it or donate
Emergency Planning Budget
Every business, large or small, will face an unplanned emergency. The important thing is to make a plan before disaster strikes to minimize loses. The key is to be proactive and to create an emergency fund. You will need a supply of cash you can quickly access to keep your business running. Create a protocol for how to deal with each type of emergency, such as:
- Staff loss
- Loss of inventory
- Legal problems
- Proactively seek out advice on:
- Employment disputes
- Data handling
- Other situations
- Proactively seek out advice on:
Other situations may include natural disasters, and other catastrophes, for which your business needs to be prepared. Although designed for a catastrophic event, like natural or man-made disasters, the FEMA website has some great tips on how to prepare your business for emergencies in general.
First, perform a risk assessment to find out which disasters are most common for your business type and research your community’s risks.
Then, assess your business functions by examining your company inside and out to figure out the staff, equipment, materials and procedures which are vital to keeping the business operating. Review your business flow chart to identify critical operations necessary for survival. Then, establish succession procedures and include at least one person who is not usually at the main office. You will need to decide who should help put together the emergency plan. Include a broad cross-section of your staff, but with expertise on vital operations.
Another important step is to make a list of your most valuable customers. Plan ways to serve them in a crisis and identify key vendors and resources you will need during a disaster. Make a list of backups as well.
Review your plan each year and make needed adjustments. It is also important to review your insurance coverage at this time, as well. Create protocols to secure buildings, supplies and materials even if they won’t be used until business returns to normal. Now is also the time to improve cybersecurity.
Budgeting for a small business is much more than creating a ledger to track income and expenses. By creating a holistic view of your cash flow, you will ensure you have the capital you need at all times to keep your business thriving.