Budgeting is important for businesses big and small. But while corporations or larger organizations might be able to stretch their budgets when necessary, small businesses often don't have the luxury of such leeway.
Because small businesses are often less financially flexible than their larger competitors and counterparts, small business owners tend to agonize over their budgets when starting out. Part of that struggle may stem from small business owners who specialize in their trade but have little experience at running a business. But determining a small business budget is essential to a business' success, as it helps owners determine if they have enough money to fund the business and its potential expansion while also providing owners with a steady income.
Each industry is different, and budgets that work for one business will not necessarily work for another. But the following tips can help business owners develop an effective budget for their businesses regardless of their industries.
Understand your industry.
Understanding your industry and knowing your product are two different things. When establishing a budget for a new business, small business owners should familiarize themselves with the industry they will be joining. Calculate the cost of machinery and materials. The prices of materials can fluctuate depending on supply and demand, but small business owners developing a budget can research how such costs fluctuated in the past or speak with current business owners to determine how much of their initial cash supply and future revenue will need to be allocated to production costs.
Another thing to learn about the industry is if there are certain trends that may dictate your revenue stream. For example, a surf shop likely won't bring in as much revenue in the winter as it will in the summertime. Such trends are not exclusive to seasonal businesses, and business owners need to take them into consideration when developing a budget for their businesses. Doing so will help you stay afloat during those times of year when your industry traditionally struggles. If you fail to do so, you may be forced to lay off workers, close your doors or both.
Know what to do with your revenue.
Developing a budget for a startup can be tricky, as it's hard to know how to allocate your revenue when you don't know how much revenue your business is going to generate. But that doesn't mean you can't allocate that yet-to-be-earned revenue. In fact, doing just that is entirely necessary. Determining your operating costs, which include cost of materials, labor, the rent or mortgage on the property where your business is housed and taxes among other expenses, helps you know how much revenue you'll need to generate to make the business work. Knowing the percentage of revenue that needs to go toward your operating costs can help you develop a realistic budget that gets you through the first few months when it's hard to determine just how much revenue the business is likely to generate.
Give yourself some breathing room.
When developing a budget for your small business, it's important to build some breathing room into that budget. This can provide some leeway should your estimated revenue fall short of your actual revenue or your business takes off and you suddenly find yourself in need of money in order to meet customer demand and/or expand the business and its staff. In addition, factoring in some breathing room will come in handy should costs beyond your control, such as rent or the cost of materials, suddenly rise.
Develop a secondary emergency budget.
Figures regarding the survival rates of new small businesses vary significantly. Conventional wisdom has long suggested such businesses fail far more often than they succeed, and many go up in flames rather quickly. However, according to the Bureau of Labor Statistics, roughly half of all new businesses survive five years or more, and about one-third survive a decade or more. But surviving five years is not necessarily a 50-50 proposition, as small business owners who plan ahead for emergencies are likely in better positions to make it to 10 years than those that don't. When developing a secondary emergency budget, include cost-cutting measures, which can make it easier to make tough decisions if money becomes tight but bills still need to be paid. Adversity is to be expected, so having a plan in place should you need to make changes makes it easier to manage that adversity.
Review the budget regularly.
Once the business has opened, owners should review their budgets to determine if money is being spent as wisely as possible. You may have overestimated certain costs, which can free up money to grow the business. Larger businesses can afford to establish yearly budgets because they have more financial flexibility. But small businesses are more vulnerable to volatile markets or unexpected costs, so small business owners should review their budgets more frequently and make changes they feel are necessary.
