Managing cash flow is one of the most challenging aspects of being a business owner. Learning to budget, however, can help you overcome this challenge.
Many entrepreneurs leave a secure job to run a business. When you do this, you move from earning a regular income to earning a more haphazard income, which can make personal budgeting difficult. The haphazard nature of business income is one of the risks of running a small business. The following tips will help any entrepreneur or small business owner reduce the risks by creating a workable budget for the business.
1. Create a Realistic Cash Flow Projection
Don’t assume your sales will live up to your projected market potential in your first year or two of operation. Your dream business may be terrific, but reality is often quite different. While it can be difficult to project income since you don’t know exactly how sales will go in any month, be as realistic in your projections as possible. It’s better to underestimate your potential business income than to overestimate when you come to budgeting.
2. List Your Essential Expenses
Essential expenses incurred in running a business include wages, taxes, rent or mortgage payments on the business property, and operating expenses such as power, water, Internet and telephone bills. You may also have legal obligations that incur a cost, such as registering your business name. When you estimate your initial startup costs, include all the essential expenses for the first six months, as this will give you some time to get your business up and running. Even if you work from home, there will be essential services and costs you’ll need to pay for your business.
3. List Discretionary Business Expenses
Discretionary expenses for a business could include buying some supplies, especially in the initial startup of a business. Do you really need to purchase new plants for the office in the first month? Or to provide free coffee or sodas for your employees? Decide which items you want, but could live without until your business can afford to purchase the items without going into debt.
While people trying to sell you advertising may tell you otherwise, expenditure on marketing is not a required cost of doing business. If your business is self-funded, or any time cash flow is tight, focus on marketing strategies that are either free — networking, public speaking, media outreach, and even cold calling — or pay-for-performance, such as affiliate marketing or referral programs. For budgeting purposes, it’s best to set your marketing expenses as a percentage of sales. Exactly what percentage depends on your industry and business model, but 2-10 percent is the starting range recommended by both SCORE and the SBA. Note, though, that it may need to be as high as 20 percent or more in certain industries, particularly during the critical brand-building stage.
4. Reduce Debt Quickly
While it may be difficult to start a business without incurring some debt, you’ll want to reduce the debt as quickly as possible. Debt costs the business more in interest repayments, so having a budget that has the business operating in the black sooner is always a good idea. If you do take out a debt for your business, ensure you will be able to make the repayments every month.
5. Never Spend All of Your Profits
Always keep some of your profits in reserve to cover contingencies. Work out a spending budget that spends less than you expect to make. Even if you are operating a small business from home, do not pay yourself all of the business profits each month. Instead, work out a reasonable wage for yourself and pay it regularly, as part of the budgeted expenses of the business. If your sales are higher than you expect in one month, don’t be tempted to splurge in the next month. Keep to your written budget and keep the additional profits aside. That way, if the sales fall unexpectedly in one month, you’ll have reserve funds available to cover the shortfall.
Write out your business budget and ensure that your expenditure is less than your actual (not projected) income. A successful business is one where both business profits and personal income for the business owner and founders continue to rise. Good budgeting techniques will help you achieve both.
Scott Allen is Vice President of Marketing for OneCoach, a business growth coaching and consulting firm that helps successful entrepreneurs achieve even more. He is coauthor of The Virtual Handshake: Opening Doors and Closing Deals Online, The Emergence of The Relationship Economy, and a contributor to over a dozen books on entrepreneurship, marketing and social media.