Have any sudden expenses attacked your business and turned your hair grey in the past?
The most possible reason could be not having a documented budget.
“Budgeting is not just for people who do not have enough money. It is for everyone who wants to ensure that their money is enough.”– Rosette Mugidde Wamamble
Why is a budget important for small business owners?
A budget never guarantees success, but it strategically controls your finances. Firstly, it forecasts revenue, plans expenditure, allocates funds strategically, and communicates the goals of the business. Secondly, it increases operational efficiency. Thirdly with a strategic budget, you can make profits on seasonal business days. Last but not the least, it secures a business from the financial crisis by improving cash flow management.
Also, as per research done by U.S. Bank, 82% of small businesses fail due to poor understanding and management of cash flow. This percentage can frighten any new small business owner. Here are 4 budgeting tips for small business owners to smoothly manage their finances.
Build a Good Credit Score:
Sticking to a budget helps you maintain enough cash to make timely payments. As a result, you have a positive payment history which is counted while calculating a business credit score. A budget enables you to pay your bills in cash and not by swiping a credit card. Due to this, it reduces small business owners’ dependency on credit cards. The lesser you swipe the card, the better the credit score you maintain.
With a sound business credit score, you can get a good amount of money at a more favorable interest rate. Banks and other lending institutions estimate your credibility with this score. So, improving business credit score is necessary for your company.
Focus on Financial Relationship:
In any organization, many departments like planning, manufacturing, sales and finance departments are interconnected. Therefore, the budget needs to be prepared considering the funds spent in one will affect the demand of funds of other departments.
For instance, if this financial year you aim to increase sales, you need to invest more in the sales & marketing department. If you observe an increase in sales, you require more products on shelves. Eventually, you need more funds to buy more inventory and pay more logistical charges.
Revisit your budget:
Large companies make annual budget plans, but small business owners should make their plans more frequently. As a new small business owner, you see a lot of ups and downs in your company’s growth. You need to revise your budget to sail through this uneven growth and profits as needed.
Updating the budget on a monthly or quarterly basis gives a clear picture of the finances of your business. At the end of the day, you make informed decisions. Also, you wisely spend and allocate your money.
Overestimate Expenses sometimes:
No one was prepared for a worldwide pandemic. Small businesses were the worst hit. That’s why the business environment is said to be dynamic and unpredictable. And so are the income and expenses of future years.
In this situation, the only tip for small business owners is overestimating their expenses. It enables a business to sustain itself in a financial crisis. On top of all, lower expenses than the forecasted one can lead to an increase in estimated profits and cash flow.
However, overestimating expenses for one department (manufacturing) can result in less allocation of money to other departments (marketing) and negatively affect the business (here sales will be less).
-by Dipali Nishad