As a small or start-up business, the management of finance is a crucial part of the mix.
From cash flow to profits, getting it wrong can swiftly kill off your venture. So it really does pay to take care of your budget.
Half of all UK startups fail within the first five years.
Although there are plenty of reasons that a small business might not succeed, many barriers to growth are related back to finance.
Cost is a huge deciding factor for SMEs and it comes in many different forms, from day-to-day bills to taxes and unforeseen circumstances.
But financial security doesn’t come as a given once you’re over the initial hurdles.
From a lack of planning to overexpansion, there are many ways in which poor budgeting can trip you up at any stage of your journey, which is why it’s vital to do your research.
As a business owner, you have a passion and a purpose.
You’re an expert in your own field, but you may not be an expert when it comes to money.
So what do you need to know?
Know your industry
You will certainly know your product, and also your customer, but how well do you know your industry?
This is more than just pointing out your competition, it’s knowing the expenditure within your sector and the potential it holds – alongside the risks.
You will have predicted sales and proposed levels of profit, but you can’t be truly sure of the money you will have coming in, in advance.
To give yourself the best possible forecast, you need to understand exactly what is happening within your industry from how much money is being put into it to its previous growth patterns.
It’s all too easy to factor in your optimistic targets when looking at your budget.
Whilst you should keep sight of where you aim to be, don’t dismiss industry averages when it comes to early-days budgeting.
These can help you to better understand, and prepare for, any peaks or slumps, .
Don’t simply assume
When you’re first starting up, you’ll have a difficult time building out a budgeting plan.
Sales figures aren’t set in stone until they start rolling in, but you will need to make an assumption about them to consider – and justify your spending.
If you have done your industry and consumer research, then your assumptions should help you out by being fairly accurate.
It is important though to remember that they are only assumptions, and should be given a little room to breathe when balancing the books.
For example, if your company turns over 2x its predicted profit in its first quarter, don’t simply go ahead and assume it will do the same in the second quarter.
If you do this, without looking into other factors, you could end up prematurely overspending.
And if profits slow up for any reason – that could land you in real financial trouble.
Assumptions and predictions are important, but so is keeping a calm head when it comes to cash going out.
Essential vs Luxury
When you’re understandably excited about your venture, it’s all too easy to get a little spend-happy.
You want to give your business the best chance of success and this often means costly decisions.
But your budget will thank you if you think sensibly here.
There will be costs that are essential to the daily running of your business – perhaps electricity, staffing or production.
Then there will be costs that you could consider as luxury.
So, strip it all back and make the time to take a close look at your bank statements, you may well be shocked to find many foolish, luxury expenses that should immediately be eliminated.
Are there any software subscriptions or recurring service fees you’re paying for but no longer use?
Cut out all the expenses that are no essential and you’ll be surprised how much you can save in a financial year.
Revisit your budget
In the world of business, things can change in the blink of an eye.
Your sales may be up, but your expenditure may be up too.
Meaning that just a short period of lagging success could have a hugely negative impact.
It’s important to keep an eye on your budget as often as you can.
It’s more easily done when you need to be careful, but should also be monitored when you’re doing well, just in case you need a little extra cushion.
Revisiting the budget is so important for a small business as you find your feet and work out your best business strategy.
Keeping to a budget can help you to monitor your ROI – showing you where your money is best-invested and where it is being wasted.
If times are good, then you will be looking to invest more and grow.
Equally, when times are hard, you will need to look at whether any costs can be squeezed.
Revisiting your budget is the best way to adapt your financial plan to suit what’s currently happening – and knowing your incomings and outgoings off by heart will mean no nasty surprises along the way.
Easy as 1, 2, 3? …
Budgeting for a small business is no easy task, particularly when financial management is not your forte.
It takes a generous amount of time and understanding to be on top of your situation, but you can certainly avoid some of the biggest financial mistakes by taking note of a few simple points.
Being smart about your forecasting and knowing as much as you can about your industry will go a long way to preparing you for the future.
While keeping a strict eye on things will help to safeguard you as you work towards growth.
Managing your budget isn’t just about cutting costs, it’s about providing a cash-flow cushion (which should be higher for a small business), as well as getting right under the skin of your industry and doing all you can to guide your business into successful times.
It is much less of a daunting task if you are clued up about your plan from the beginning, and are meticulous at keeping it in line.
It’s not always an easy process, but take note of this advice and you could be quids in.
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