Creating a realistic budget is one of the best ways to grow your business sustainably and protect against leaner times. A budget gives you more control over the financial health of your business, allowing you to manage cash flow, create spending limits and set meaningful goals. Smart budgeting should be something you do early and often, so here are five practical budgeting tips to help your business survive, grow and flourish.
Calculate Your Costs
The first step toward creating a realistic budget is taking a critical look at expenses. Many business owners keep their average monthly costs in their heads, but you should really dig into how much cash is leaving the bank account each month.
Your costs fall into two categories: fixed and variable. Fixed costs include things like rent, which stays the same every month. Variable costs fluctuate along with your volume of work like materials and supplies for physical products or employee time for service businesses.
You’ll also factor in marketing spend, legal expenses, and software subscriptions. These can quickly grow out of control so make sure you’re tracking them closely. If possible, have your business partner or accountant look over your records to point out things you’ve missed or costs you may be able to reduce.
Estimate Your Revenue
Estimating your revenue can be difficult, but don’t skip this step. It’s worth putting time and effort into creating a realistic projection because it allows you to plan expenses and manage cash flow. You should make both an aggressive and conservative projection of future sales to help you plan for multiple scenarios.
Calculate Your Profit Margin
Your profit margin is a measure of how much money you’re actually making. It’s important to calculate this metric regularly and keep track of your progress so you can understand whether or not your business is growing, and at what rate.
To calculate your gross profit margin, subtract your costs from your revenue. Then divide this amount by your net sales to get your margin percentage. If this number is increasing each month, that’s a great sign. If it’s decreasing, you may need to reduce spending. Quick tip: check with your accountant for your industry’s typical margin then benchmark your monthly calculation against it.
Plan for Cash Flow
Profit margin is important, but cash flow is equally vital to the health of your business. When growing your business, your cash outflows may outpace increases in sales for a period of time, so planning for these situations is incredibly important.
If you’ve been in business for a year or more, you can use past data to predict what your cash flow will look like each month. However, if your business is still new it’s time to research trends in your industry so you can plan and prepare.
Prepare for Emergencies
Even the most successful businesses experience challenges, so it pays to have a contingency fund set aside to keep your business afloat in hard times.
Your rainy day funds might take the form of savings, at least in part, but it’s also worth knowing about financing options available to you. Some options include business credit cards, which provide short-term cash flow relief, or lines of credit for helping you over a longer-term with considerably lower interest rates.
When done right, budgeting can accelerate the growth of your business by identifying areas for investment and identifying potential challenges before they happen. A good budget puts you in control of your finances and is a fantastic tool for making decisions for sustainable growth. Review it often, learn from mistakes and reward your successes along the way!