As a small business owner, keeping track of your company’s cash-flow is critically important. In fact, according to a study by U.S. Bank, 82 percent of businesses fail due to cash-flow problems. Creating a business budget is the best way to ensure ] your business remains financially sound. While this may seem like a difficult task, the process is actually simple if you follow a few smart tips and is likely to provide eye-opening insights into the financial health of your company.
Identify Fixed Income and Expenses
Most businesses have more than one source of income. While you probably have an idea of your monthly income from sales or services provided, there’s a good chance that you’re overlooking other forms of income. If you have savings, investment income or rental income, these should all be added to the tally of your total monthly income.
To create an accurate budget, you also need to know how much of your income goes toward expenses, including debt. Large fixed expenses like rent/mortgage and utility payments should be figured out first, followed by operation costs like employee salaries and health insurance payments, supplier costs and banking fees, and any other monthly expenses. Don’t forget to add in any loan or self-employment tax payments that you need to make.
Account for Variable Expenses
Once you have a baseline understanding of how much money you have coming in and out each month, you need to go a step further and account for variable expenses. If your company hires contractors or spends more on advertising during a certain time of year, you’ll want to factor this into your budget as well. Similarly, if your sales representatives receive a bonus at varying times, this should also be added. Records from previous years can be especially helpful when calculating variable costs.
Trim What You Can
Many business owners make the mistake of assuming that their expenses are written in stone. Can you afford to pay your rent six months in advance? If so, there’s a good chance that your landlord will offer you a discount on rent. In the case of your utilities, a simple call to your internet or phone provider can easily result in a lower bill, especially if you opt for a plan that meets your specific needs instead of a generic one-size-fits-all. You may also want to do a bit of research to find out what type of deals competitors are offering for those who switch providers.
Banks also tend to have different types of business bank accounts so you may be able to find one that better suits your needs with a lower maintenance fee or more favorable transaction costs.
Computer software programs for payroll processing and customer service can help you operate more efficiently and with less staff.
For many small business owners, loan payments and supplier costs are second only to rent/mortgage expenses. Lenders are often willing to accept reduced payments and or a better interest rate as an alternative to having a client default on a loan. If interest rates are currently more favorable and/or your credit score has improved since your original loan, consolidating your loan at a lower rate can significantly reduce your monthly expenses.
Suppliers, on the other hand, prefer to get their payments up front and may be willing to offer you a discount if you can pay in advance. Doing so will also make budgeting for the year ahead easier, as you will have already met one of your biggest expenses.
Each business is different, but they all require effective budgeting in order to remain healthy. Having a complete understanding of your company’s cash-flow process will make it financially stronger and more efficient for years to come.