Starting a small business is no easy task. Whether a brick and mortar store or an online shop, there is a vast amount of strategy and planning that must be done. Most importantly, devising a financial plan will help you to keep expenses low and profits high. However, this is a lot easier said than done. Budgeting and financing business are very intricate and pertinent tasks that have a tremendous impact on the success of your business. Thankfully, there are a number of tips and ticks out there to help you. Educating yourself on your options is the best way to execute a successful budget and financial plan. Keep reading for some budgeting starting points to create a thriving business strategy.
Understand Your Type of Business
Before you can create a budget for your business, you must understand the different types of businesses that exist, as they each come with very different sets of expenses and expected profits.
Seasonal businesses, for example, are very difficult to run without a well-kept budget. It’s a good idea to track all transactions during the on-season to create a consistent method and forecast for expenses and profits in the future. Also, because of the inconsistent cash flow that comes with seasonal businesses from month-to-month, it’s important to estimate how much money you’ll need for your business to survive during the off-season and budget for it ahead of time. Small fixes like this can make a world of difference in the long run.
For eCommerce businesses, you’ll have to consider a number of expenses that differ from brick and mortar, inventory-based businesses. Things like web hosting services, web design, advertising, and social media all have to be included in your budgeting. Shipping costs are a huge factor as well.
Service businesses differ entirely from these other types of businesses in that their budgeting is focused mostly on projections. Sales, salaries, and customer counts will likely be predicted without hard numbers and data like an inventory-based or eCommerce business. This is why it’s a good idea to provide a good amount of flexibility within a service business’s budget to account for the lack of accuracy in the beginning stages. However, as your business grows over the years, you’ll likely be able to predict and execute much more consistent sales goals and profits.
Check the Industry and Competition
Next, you’ll want to reference industry trends and analyze the competition. Doing so will help to give startup companies a reference point of how expenses and profits should look while giving all businesses an idea of where their competitors are lacking. For companies whose records are made public, many businesses conduct a full SWOT analysis:
- Strengths: Identify areas where the company spends efficiently and effectively to show high conversion rates in profits
- Weaknesses: Identify areas where the company overspends on elements that do not produce a strong ROI
- Opportunities: Point out area for improvement that can be addressed in upcoming budgets
- Threats: Concern yourself with elements of your budget that are hurting your business and areas where competitors are implementing better strategies and in turn, overtaking your customer base.
To get the best comparison and understanding from the analysis, set up a SWOT template for your own business and one for your competitors to estimate when and where they can make better budgeting decisions and how you can get the upper hand. This SWOT analysis can be utilized in other areas of your business aside from budgeting as well.
Now that you have determined your type of business and analyzed your industry and competition, it’s time to get to the nitty-gritty— expenses. Determining what expenses you can expect within a set period of time is key to creating a successful budget. There are several types of expenses that you may occur over time so let’s dig into what each one is and some budgeting best practices.
Fixed costs are essentially every expense that you are guaranteed to incur over a set period of time. This can include things such as rent, utilities, accounting fees, legal services, etc. These expenses are, and will continue to be, required so it is important that you consider them in every budget you have. This is the best area to reference other businesses within your industry to grasp an understanding of how much is to be spent on fixed costs. Then from there, you can evaluate what of those costs you need and don’t need in order to fit within your budget.
You’ll find the most flexibility within your budget when it comes to variable costs— hence the name. They typically consist of items within your budget that will likely change in necessity, quantity, or price over time. Travel expenses, production costs, raw materials, and packaging expenses will all differ between each period. Luckily, by keeping track of them through a budget, you can easily make decisions on what items you are overspending on or don’t need.
Commonly occurring at the setup or a transitional point within the company, one-time expenses come into play. Like fixed expenses, they are not regular transactions however, they do need to be accounted for as an expense. As indicated by their name, they are items that your business may only need to purchase a one-time. This can include business registrations, software systems, equipment, or furniture. You’ll want to budget for these well ahead of time to make sure that you are not hurting your own business with unexpected purchases.
Cash Flow & Profits
Lastly, you’ll want to add in your cash flow which is essentially the amount of money that is going in and out of your company. Ideally, you’ll want to be left with positive cash flow at the end of your accounting or budgeting period. This means that your revenue is greater than your expenses which, of course, is the goal. Then, if you have executed your budget properly and considered all of your company’s expenses and cash flows, you should be left with a substantial amount of profit. Between periods, you should be noticing that your profits are increasing, as this is the number one indication of a growing business.
If you don’t notice any growth or are seeing a decline in profits, this is where you’ll want to check your expenses and/or profit margin again. If you can cut back on some expenses, that’s a rather simple way to increase your profit. However, if your profits still aren’t growing substantially, you may want to go back and take a look at your profit margin and whether or not it has room to expand.
Budgeting Tools and Technology
While you may have a small business with a seemingly small budget, it’s always a good idea to adopt a budgeting tool to assist you in making your plans. At the very least, a third-party tool will help you to stay organized and see your goals plainly instead of having to recalculate in the future.
Automation, for example, has strongly supported budgeting efforts in recent years. Not only has it made the process of logging transactions easier, but it is perfect for trend forecasting as well. With the assistance of automation, you can easily compile transaction data and analyze it to make financial projections and decisions in the future. However, automation can be a very intricate technology to implement especially as a startup company. Yet, it is a great investment for the future because it offers so much opportunity for budget and company growth.
Another tool that’s commonly used by small businesses to ease the challenges of making and sustaining a budget is Scoro. This software’s user-friendly interface makes budgeting for your business easier than ever. It offers budget planning, forecasting, financial KPIs and so much more. But what makes a software system like this so beneficial to a number of small businesses is that they are able to combine several business-related tools all-in-one. Aside from the basic budgeting, your business may need, the software also integrates project management and customer relationship management (CRM) capabilities to give you a central place to carry-out many of your business’s needs.
Review Your Budget Frequently
Lastly, and arguably one of the most important steps to budget your small business is to review your budget frequently. Your budget will constantly evolve as your company grows. However, to understand budgeting best practices and any trends in your expenses or cash flows, you need to be up-to-date on what your budget looks like. The more understanding you have of your budget, the better your financial decisions will be in the long run. Also, be sure to look back at any competitor or industry reports you compiled early on. They can be great for understanding if your company is headed in the right direction.
Creating a budget for your small business is no easy task. But before you just dive right in, make sure that you are considering the type of business you have, industry competitors, all transactions, and the tools you have available to assist you. Doing so will set you up to create an efficient and helpful budget for your business.
About the author
Marie Johnson is a tech writer for the technology magazine Enlightened Digital. She also works as a UX designer for a major tech company based out of New York. With her passion for writing and years of experience in the field of technology, she now enjoys combining the two worlds and sharing her knowledge and tips with the online tech community.