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Small Business Budgeting 101
01/23/2018

Small Business Budgeting 101

Bookkeeping basics for your new business

Small Business Budgeting 101

If you have just started a new business or are planning to, budgeting is probably one of the first things on your mind. Estimating and matching expenses to revenue helps business owners determine whether they have sufficient funds to expand their business, generate income, or grow the operation.

Don’t procrastinate

According to Eric Siu, contributor for Entrepeneur.com, new business owners often make the mistake of putting off their bookkeeping needs. “If you aren’t financially-minded, programs such as Quickbooks can make small-business accounting seem completely unmanageable, especially if all you need to do is send out a few invoices and track a few expenses,” he writes in an article.

Clearly, procrastinating isn’t advisable—if you put off accounting and budgeting work, you’ll have an even bigger task ahead of you the next time, which might encourage you to procrastinate some more. However, Siu argues that small-business bookkeeping is actually very simple. “If you break everything down into small categories—categorizing expenses, paying employees, sending invoices—the whole thing becomes much more manageable and the compulsion to put it off lessens.”

Understand seasonal cycles

Understanding seasonal cash flow is the key to growing a small business. Your company may have a major seasonal spike in business followed by a slow period.

“Business is cyclical, meaning there will be times throughout the year when business is better than at other times, and income can vary from month to month,” warns Heather Castle in an article for NerdWallet.com.

It is important to learn these cycles and to not spend what might feel like extra cash when business is good, as you may need that cushion to help get the company through the slower months later. The variability of cash flow can also depend on sales cycles instead of seasons. If your cycle is fast enough, having a cash buffer might not be necessary.

On the other hand, “if you’re a business-to-business company whose sales cycles last months, or even years, having extra capital in the bank can mean the difference between being able to weather the long periods before revenue from past sales manifests and having to fold early because your cash has dried up,” Siu writes.

Diversify investments

After starting a promising new business, it is understandable to feel the urge to invest all of your available funds into its success. However, though it is a good idea to invest in your business, it is advisable to set limits on it.

“When business owners invest their funds back into their companies, they are concentrating funds into one asset,” Castle writes. “This increases their level of risk because if something were to happen to their business, it would endanger the household’s financial security.”

When budgeting and reviewing investment options, diversify and protect your portfolio by investing as much money as you can afford outside of your business and even outside of your industry and sector.

Review periodically and focus on your strengths

While big companies usually draft a budget on an annual basis, small business owners should strive to do so more often. “Many small business owners find themselves planning just a month or two ahead because business can be quite volatile and unexpected expenses can throw off revenue assumptions,” says Glenn Curtis in an article for Investopedia.com.

Additionally, don’t give in to the temptation to reinvent the wheel and dilute the core of your business by trying to do too many things at once, especially if it involves distracting existing employees from their original roles or creating your own internal solutions to problems that have already been tackled in the industry. Siu says the latter is a common issue among software-as-a-service providers, but it can serve as an example for other types of businesses as well.

“The problem with this approach is that it wastes your time,” Siu writes. “It might save you a few pennies at the end of the day, but the cash you’ll save is peanuts compared to what it costs you to take a key employee away from those activities that drive revenue to your business. Instead, it’s far more cost-effective to work with existing providers and use the tools that they’ve already perfected.”

By keeping a constant eye on your business’ budget, you will be in a much better position to succeed.
 
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