Efficient budgeting is essential to any small business and will often dictate how successful a company will be in the long term. Having a firm grip on your finances not only allows you to plan for a more secure future, but it also provides an insight into which parts of your business are problematic.
If you find yourself struggling when it becomes time to pay the rent, it should be obvious that better organisation of your key expenses is in order. If it becomes apparent that capital isn’t flowing freely through your business, better clash flow management is necessary. Budgeting is a great way to ensure that the future of a business is bright and to highlight areas where there is room for improvement. With this in mind, here are our top five tips for successful budgeting.
1. Cash flow projections
When it comes to estimating your potential sales and profit figures, it is always better to be realistic. Although a business may appear incredibly successful, it is impossible to predict the future. Small businesses are particularly at risk from cash flow crises and need to be wary. Consequently, reserved estimations ensure a healthy cash flow and keep your business from drying up.
2. Pay off debt quickly
It is incredibly difficult to start a small business without accruing some type of debt. This in itself is not a problem, though entrepreneurs should attempt to begin paying off their debt as soon as possible. The interest payable on most debt can be a black cloud hovering over newer businesses and, if left too long, can cause serious financial problems.
3. Build a reserve from profits
Though it may be tempting to reinvest all the profits from a good month back into the business, it is better to have a contingency reserve in case of emergency. Markets are volatile and the business world difficult to predict, so a small ‘bank’ of monetary reserves on which you draw from when times are tough makes good business sense.
4. Know your industry
When budgeting, it is always a good idea to have a comprehensive understanding of expected expenses in the industry. This means researching what other businesses tend to spend their revenue on and establishing whether these costs apply to your business. The most important considerations will be your essentials, such as rent, utilities, raw materials and labour.
5. Review regularly
Finally, it’s vital that small business owners regularly re-evaluate their budget and budgeting processes to ensure that it is still applicable to their context and situation.While larger organisations may do this annually, the fact that smaller business are much more volatile means that they may have to do this every month or two. Reviewing more regularly may be time consuming but it can be highly beneficial in the long term.
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