Without a sound budget, a small business could flounder. However, a number of owners and managers may not place enough weight on this basic principle. If this is the case, success may be hard to come by.
On the contrary, a great financial plan could be the perfect addition to any company. Every small business owner should figure out how to spend money properly, and the following steps could help make that process easier.
Start from the ground up
As with many things, a company needs to walk before it can run. This applies to a budget as well. Firms should start off small and simple before expanding on a financial plan.
A good budget should be able to track cash, expenses and revenue, according to Inc. magazine. It can also provide valuable insights, and help owners prevent problems before they multiply.
"It's like a roadmap for your company," Victor Butcher, former president of the Tennessee Society of Certified Public Accountants' Memphis Chapter, told the news source. "You need the roadmap to understand where you're going with your business."
Budgets can be specific, but all small businesses should at least start yearly, Inc. magazine noted. Dividing the plan up into 12-month segments can help, so estimates can be tracked alongside the actual results when they come in. If one has already been created for last year, those figures can make the new budget quite easy to build. However, for a company starting out, two places to focus on are sales and profits. These numbers will dictate most of what comes after, like expenses and other costs.
Don't make frequent budget mistakes
A budget – and a financial plan – can go wrong in a number of places. It is up to a small business owner to keep track of everything. According to Entrepreneur magazine, problems often arise between net income and the actual cash a company has – although there are several fixes.
One area is accounts receivable. The problems crop up when customers are late to pay. This could occur for several reasons, like homebuilders who need to buy supplies but don't get paid until the house is finished. However, a small business can offer discounts for prepayment, and then follow up regularly to make sure the outstanding balance gets paid.
In addition, some firms don't plan ahead for the off-season. Supplies and costs should be covered in advance, so when profits dip, the business is still prepared. Instead of waiting, a budget could help predict when money will be tight – and when buying ahead can be afforded.