Twenty percent of small businesses fail in their first year, and only fifty percent will survive up to their fifth year. Among the top four reasons that can put small businesses in jeopardy is running out of money.
Lack of funding or business cash flow doesn’t happen overnight unless someone embezzled the money. Often, it occurs when the owner is caught unaware that their business is on a slow and steady trip to the red zone. The reason for the demise was not having an intimate knowledge of the business budget.
As Money Guru Dave Ramsey said, “a budget is telling your money where to go instead of wondering where it went.”
Having a precise and accurate budgeting system is non-negotiable for a smart business owner. Here’s a simple guide on how to create one.
Table of Contents
Track Down Your Revenue
Business is war. And the first lesson from the Art of War is to know thyself.
Money is your army and the lifeblood of your business. That’s why it’s crucial to examine your revenue. The revenue is all your income sources; it’s the money that comes into your business each month.
You may have income streams that come from different sources. Ensure that you account for all of them and do this for multiple months, preferably for at least a year.
You can get a clearer picture of how the cash flows into your business. That’s how you can prepare for the peaks and slumps that happen in certain months during the year.
Determine Your Fixed Business Costs
The next step of planning your budget is to find out where the money may bleed out from. An excellent place to start is to look at your fixed costs.
Your fixed costs are expenses that stay the same regardless of how much you make. These are the regular operating costs that you’re expecting daily, weekly, monthly, or even yearly. Examples include rent, insurance, payroll, taxes, utilities, etc.
The Business Budget Should Account for Variable and One-Off Costs
How nice it would be if a business only has predictable fixed costs to keep track of. Unfortunately, operating a business is a bit more complicated than that.
Variable costs change from month to month depending on how your business performs during a certain period. These include things like sales commissions, travel costs, and credit card fees. They’re still regular expenses that you pay for each month, but they don’t come with a fixed price tag.
On the other hand, one-off costs are expenses that aren’t necessarily unexpected but can happen every once in a while. Examples are replacing a piece of equipment that has broken down or hiring an IT professional to deal with a security breach.
It’s vital to set aside an emergency fund to deal with these situations. Also, a fast way to pay for unexpected costs would be advantageous. Look here for information on virtual debit cards that can quickly address the purchasing needs of your business.
Tally Everything Up
Now all you have to do to round up your business budget is to put it all together. It’s as simple as tallying your total income and your total expenses. The total expenses include your total fixed costs and the variable and one-time spending.
From there, just subtract the total expenses from the total income to determine the profitability of your business. Now you won’t be blindsided if your business is in danger of going in the red.
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