At the heart of your business’s success is healthy cash flow. The more funds you have; the easier it is to expand into new markets, purchase decent equipment, and hire workers to help out.
Budgeting allows you to keep a track of and plan how to spend your money. It helps you identify crucial areas to allocate funds and prioritise spending.
However, most small businesses find it extremely hard to create a budget for their company. So, to help you get going with budgeting for your small business, we have seven tips that may help.
Understand the associated risks
Every business is unique, with a set of different challenges. Hence, it is essential to the success of your budget to understand all the potential risks and account for them in your budget.
Keep your eyes on new changes to tax laws, health insurance policies, and even overtime regulations as all these could have significant financial implications for your business.
Make provisions for the unknown
Once you identify all the potential risks your organisation faces, the next step in your budgeting process is to make estimated provisions for these unknowns.
You may want to factor in a cushion of spending money to make sure you have enough money to keep your business going when any unexpected events hits.
Perhaps, taking out an insurance policy for your business against a slow season, having a backup credit line with your suppliers, or even stacking up emergency funds are buffer actions you may want to consider.
Develop a dynamic pricing strategy
Remember a key component of your budget is revenue projections, which often is a function of your pricing policy.
How much you make from one unit of service/product sold is tied to your price and considering the fast-changing market landscape you will want to develop a pricing strategy that is flexible and adaptive to the changes that may affect your industry.
An excellent example of a dynamic pricing strategy is Uber’s surge pricing model that quickly adjusts prices for a trip based on demand and availability of drivers.
Seek to cut costs
Budgets in the long term should help you be cost-effective and ensure you are getting the highest return for the money you have invested.
One way to reduce costs is to take a look at some of the items that can be controlled. For example how many times a week does the office need to be cleaned.
Be sure to understand relationships between items
As you seek to allocate and reallocate resources, plus cutting down on spending, it’s essential you understand the impact changing one item line will have on other items in your budget.
For instance, if your target is to increase sales say by 20%, be sure to also take into account the likely increase in variable costs associated with sales. Balance your budget as best as you can.
Research industry standards
This should probably be up there as one of the first things to do before creating your budget. You want to get an idea of how your company compares with other organisations in the same industry.
To research your industry, you may want to use the IRS website to get a sense of the average budets of companies of the same size.
Another good way to get firsthand information is to speak with small business owners themselves.
Armed with the new information and insights, you can now design a budget that is more in tune with industry trends.
Update your budget regularly
You can opt to review your budget performance on a monthly, quarterly, or yearly basis.
This way, you are able to compare your estimates with actual figures. And then make adjustments where necessary.
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