How Strict Should Your Business Budget Be?
Creating a budget is an essential first step in building your business. Many financial indicators, however, are unpredictable. As a result, you may find your revenue is lower than expected or that your overhead costs fluctuate.
The U.S. Small Business Administration recommends updating your budget on a monthly basis. That way, you can identify cost overruns and modify your assumptions accordingly. But creating — and modifying — a budget is just one way to ensure the long-term financial health of your business.
Develop a Budget
You have options when you sit down to start a budget. You can list out your expenses and weigh them against your projected revenue. Or, you may want to start with a specific profit goal and then calculate the investment you’ll need to reach that profit. Whatever method you choose, remember to take into account all of your essential overhead costs, like rent, utilities, cost of goods sold, payroll, interest expense on debt, and taxes. One way to estimate revenues is to use last year’s figures or if you are a new business, market research for your industry.
Monitor Your Receivables
While you focus on sales, outstanding invoices may stay on your books unpaid. Delays in payment can cause disruption in your budget. Instead of paying expenses out of revenue, you may find you are using loans or other borrowed funds to keep the lights on. As a result, your profits may go to debt servicing — something that may be avoided if clients paid more quickly. When reviewing your budget, take into account when money is actually coming in — not just when you’re making sales. Also, regularly review expenses to see if there are areas you can cut back.
Manage Cash Flow
If you consistently experience cash shortfalls, consider ways to improve your cash flow. You can start with your receivables. You can shorten the payment terms, for example, from 90 to 30 days. In order to maintain positive relationships with customers, you can keep the payment terms the same, but offer a discount for early payment. You can also partner with a factoring company which pays you the majority of the book value of your receivables up front, less a processing fee.
Creating and monitoring your business budget is essential. It offers a clear indication of whether your business is on track or could benefit from alternative financing options. Often just a few modifications to how you receive payment and being frugal with overhead are enough to stay cash flow positive.