Take control of your finances before they take control of you
It’s vital for any business owner to develop a budget in order to manage the company’s financial affairs. A budget not only allows business owners to handle their day-to-day financial operations in an efficient manner, but it is also essential for achieving the overriding goal of any business—making a profit.
But just developing a budget is not enough. Unless you and your employees are trained in accounting or finance, many of the nuances of working with a budget will be unfamiliar and challenging. When running a business, a budget is important for far more than just record-keeping and tax purposes—it’s the foundation for determining how to run your business and be successful. In order to effectively manage a budget, you and your staff need to be aware of a few fundamental strategies for living within your business’ financial means and maximizing your profits. The following eight strategies offer a helpful foundation.
1. Review your budget before committing any new funds. It’s critical that you are aware of your budgetary limitations before you decide to spend more money. This may seem like accounting 101, but it happens far more often than most people realize. Never commit to new spending unless you’ve carefully reviewed your budget and found that the funds are actually available.
2. If you absolutely have to spend funds for something that’s not in your budget, remove or postpone spending an equal amount from something else already in the budget. This is known as a budgetary tradeoff, and it’s a common strategy for saving money. Find the items that are the highest priority and spend on those first, while spending less or delaying payment for items of less importance. Providing for the flexible allocation of funds is one of the primary purposes of budgets, so take advantage of it.
3. Another budgetary tradeoff involves correctly timing your spending. Don’t spend ahead of your budget’s schedule, or you will throw things out of whack. If you have to spend before you planned, postpone another item that’s in the same time period until you can get caught up.
4. If the revenue you initially planned on doesn’t come in, use the budget to adequately decrease your spending to offset the shortfall. Typically, when revenue is less than planned, you won’t need to spend as much to support it. Review the budget to find what you allocated to support the revenue that failed to develop and adjust your spending accordingly.
5. Don’t spend all of your profits. Even if your revenues are higher than expected, always keep some of your profits in reserve to cover contingencies. When allocating your spending, always try to spend less than you expect to make, even if things are going really well. For example, don’t dramatically increase your monthly spending just because the current month had better-than-expected sales. Stick to your original budget and set aside the extra profits. By doing this, you’ll be covered if your revenue unexpectedly falls short in the future.
6. Break your budget into smaller, more manageable portions. While most business budgets are developed yearly, it’s much easier to manage a budget when it’s broken down into quarters. Carefully check and monitor the progress of your budget every three months. Not only is it easier to manage a three-month budget, but it’s a lot safer as well, since you can more quickly detect and correct any problems.
7. Don’t be afraid to use your budget to negotiate price with vendors. If a vendor proposes new prices at a level that exceeds your budget, it’s perfectly legitimate to let your vendor know that you’re not authorized to spend more than what is allocated in your budget. Most vendors want your business bad enough that they will work with you, so they don’t lose you as a customer.
8. Tie in employee incentives with budget performance. While most lower-level employees are unfamiliar with—and mostly unconcerned by—a business’ overall budget, you can get them engaged by tying in performance bonuses to your budget’s performance. When you plan your annual budget, meet with employees and set parameters for bonuses based around specific performance goals, such as profit, return on marketing/advertising, decreased expenses, exceeding project deadlines, etc. Such bonuses stand to not only make budget management a team affair, but it can also be a great way to motivate staff and improve performance.
Sources: U.S. Small Business Administration (www.sba.gov), Reliable Plant (www.reliableplant.com), Investopedia (www.investopedia.com), All Business (www.allbusiness.com), Mashable (www.mashable.com).