The practice of structuring your small business operations around a budget is common, and one that is strongly encouraged by business professionals and experts alike. The importance and sensibility of creating a budget for your entire operations, or even for a project like remodeling a storefront cannot be underestimated.
Investopedia shares the following basic principle about budgeting, “Estimating and matching expenses to revenue (real or anticipated) is important because it helps small business owners to determine whether they have enough money to fund operations, expand the business and generate income for themselves. Without a budget or a plan, a business runs the risk of spending more money than it is taking in, or conversely, not spending enough money to grow the business and compete.”
But, what happens when you set a budget and you still feel suffocated by the lack of cash flow and out-of-control operations? Or when you’re exceeding your own financial goals with valuable products and smart decisions, and you can’t imagine slowing down to see where your dollars go? The fact is both scenarios can mean trouble in the long run for you, your employees and your customers.
Electronic Payment Exchange’s (EPX) Finance Director, Brad Stepp, has a few suggestions on how to really examine your operations budget, along with tips on understanding how using a budget can help you achieve the results that you are capable of delivering.
Understanding the Importance of managing cash flow
- Are you tired of asking for more time to pay one of your vendors?
- Do you know exactly how much of an upfront payment you need from a customer to cover the costs of the job and your personal expenses until you are paid for your efforts?
- Do you pay overdraft fees?
Cash flow is the heartbeat of any business, and is especially important for small business owners who don’t have the resources of larger companies. Properly managing the incoming cash and outgoing cash via proper planning is critical to ensuring profitability and solvency. Start with your current bank account balance (or balances), then project the operating expenses (cash outflows required to generate cash inflows), and any required owners draw over the next month, quarter, and year. If, at one point, you know that your cash outflows will exceed cash inflows over a particular period, prepare by lining up financing from a bank or obtaining interest-free (or low interest) financing. You can accomplish this by opening a new credit card that offers this initial benefit. At the end of the day, the goal of any business is to ensure that you have cash left over after each job to use for investment in the company, or to use for personal reasons.
Tie your budget in with your quoting process
- How do you know that you are making money on each sale or job?
- Are the costs for travel, packaging, review, and client meetings factored into your price?
- Are these costs factored into your budget?
When quoting a job or analyzing a potential purchase, try to stay away from only focusing on the big ticket items such as materials. Ensure that you understand how the materials will be delivered, where they will be delivered, how long until the materials are consumed, and how you plan to pay for them. Build a simple spreadsheet (or use another template) that includes material cost, the number of hours spent quoting and analyzing the work, the number of work hours needed, and any indirect material costs. Ensure that you consider gas for any machines, wear and tear on equipment, travel costs, and any setup costs. Even if the initial template is not perfect, just start using it. When you have free time, continually update the template until you are satisfied with the cost projections. If you didn’t make as much money as you wanted for each job or purchase, incorporate and document lessons learned from each job (e.g. when ordering this good, always buy a large quantity to ensure that you receive the volume discount). Perhaps the most important part of this is to periodically (monthly, quarterly, annually) compare actual costs to your original projection to determine whether you made money on each job and, most importantly, where you need to make changes to your quoting process.
Goal Setting and Performance Management
- How do you measure performance? By sales volume, number of jobs, or number of payments received?
With any endeavor, it’s important to set goals and focus your attention on achieving those goals. A budget is a great way to measure your progress against goals and to ensure that you are consistently challenging yourself. In our competitive marketplace, it is very important to keep improving and finding ways to lower costs and increase revenue. Budgeting is a great way to measure this performance.
Let’s face it, no one launches a startup or dedicates years to growing a small business thinking it will fail, but here are the facts: More than 50 percent of small businesses fail in the first four years. The significant financial deficits that lead to small business failure can be prevented with sound and consistent budgeting that adjusts to the ebbs and flows of business ownership and sets the tone for financial and fiscal responsibility.
Will your business be around for next year or the next generation? We sure hope so, and we hope you find these tools useful in making longevity a reality.