Budgeting Tips for Small Businesses
Creating and reexamining the budget for your small business will empower you to make smarter spending decisions and identify areas for improvement—whether that’s process improvement or a better way to market your products or services. A budget will also help you decide if it’s time to expand or if it’s time to prepare for financial fluctuation.
Focus on your emergency fund
Just like with your personal budget, your business budget should include growing an emergency fund to help you weather unexpected costs and/or a dip in sales. Factors that could suddenly affect your cashflow or expenditures include tariffs, reduced consumer spending, natural disasters, and cybersecurity attacks. The importance of being able to quickly bounce back from any of these setbacks is critical. According to the Federal Emergency Management Agency (FEMA), 90% of businesses that don’t reopen within five days of a disaster fail within a year.
For these reasons, it’s smart to include a line item in your budget to grow and then maintain a healthy emergency fund. This fund should be easily accessible and liquid (i.e. cash and not other assets that will take time, effort, or money to convert to cash).
Apply for financing
It might sound counterintuitive, but the best time to apply for financing is when you don’t need it! When a situation where you desperately need it—say cash flow has dried up unexpectedly—comes around, you’ll be a higher risk in the eyes of a lender, and they may offer less favorable terms. Having access to a business loan, line of credit, or other financing from your credit union will also give you the option to expand when the time is right.
Flexible financing products, like a line of credit or business credit card, allow you to lock in affordable interest rates and terms now for when you need it later.
For every investment in your business that you make, you should first calculate it’s return on investment (ROI). This is how the action or purchase will pay you back over time. Ideally, the ROI should be greater than the cost. Be sure the ROI on everything from employee training to marketing efforts has a proven and profitable ROI. If you can’t identify the action’s ROI, it’s time to reevaluate it in search of something better.
Reduce fixed costs
This may be the most obvious way to manage your small business budget. Reducing costs can help you build an emergency fund, become more efficient with cash and assets, and invest in areas with higher ROIs.
One way to reduce costs is to reduce the money tied up in long-term commitments, like vendor contracts. In the short-term, this may cost you a little more money, but it gives you the ability to walk away in favor of a better deal down the road. Investigate and run scenarios for your business to decide if long-term contract discounts are worth it.
Ultimately, reducing fixed costs is a balancing act to save money and retain enough flexibility to scale up or down when needed.
Understand your risks
To help understand your long- and short-term risks, list out your guaranteed income and expenses per month. Risks can include impending minimum wage or healthcare requirement changes, potential natural disasters or theft, and reliance on an inconsistent workforce. The greater your guaranteed income over the risks, the more liquid your company is. Budgeting for your business’s financial future means ensuring the risks don’t outweigh the income and assets.
Involve your employees
Everyone at your business affects the budget in some way or another. And they each have a unique perspective on the actions that could save or earn more money. Don’t ignore this resource of ideas and insights when updating your business budget. Involving employees has the added bonus of (hopefully) earning their investment in helping the business run more smoothly and at a higher profit.
Find a CPA if you don’t already have one
A DIY attitude is a key element of the entrepreneurial spirit; however, there’s a time when an expert should be called in. A CPA is a critical financial resource. They can advise you on specific and tailored next steps to run a financially stable and thriving business.
Reviewing your business budget might not be your favorite part of being a small business owner, but it’s a crucial one. And the earlier you implement good budgeting habits, the less time you need to spend on it later.