Your budget tells a two-fold story. Not only does it outline the money that comes in and out of your life, it also tells the story of your priorities as an individual. The same goes for your small business. Is your small business prioritizing decreasing costs? Tracking money you’ll owe in the future? Improving your profit margins? All of the above? When it comes to managing business finances, small businesses across industries rely on an effective budget to keep their finances in order and progress toward important milestones like paying off your equipment loans. The following article will outline how you can create, maintain, and optimize your small business budget as well as utilize financial management tools in order to stay away from unnecessary debt and build a healthy business.
Why creating a budget should be your first step in managing business finances
A budget is generally defined as a spending plan for your money. It allows you to estimate future income and anticipate expenses as well as track what actually happens so you can adjust your budget as needed. It’s a living document where you can track your cash flow, outline financial goals, and make progress toward them.
NerdWallet names having a budget as one of, if not the, top strategy to avoid going into unnecessary debt or getting into trouble with overspending. One major reason unnecessary debt occurs is that when surprise costs or emergencies occur, individuals or businesses are not budgetarily prepared.
Additionally, it is often necessary for you to have a business plan that reflects a sound budget in order to get a loan. Not only may it be required, but before making a substantial investment, you need to know if you will be able to afford the loan repayments each month by including this payment in your projected budget.
An article from The Balance outlines how budgets can help you measure the performance of your business by comparing what was budgeted against actual revenue and expenses that occurred. If your business is not where you want it to be financially, having a sound budget that you revisit often is the only way to know why and strategize what you can change. You will be able to pinpoint where costs can be reduced.
You’re probably familiar with common budgeting strategies for personal finances such as the envelope system and the 50/30/20 budget. While many of the principles of personal budgeting will apply to your business finances as well such as saving and being organized, read on to learn about some elements you’ll want to especially consider for your business to maintain a successful budget.
Three tips for maintaining an effective budget
1. Track different categories of expenditures
Include a projection of fixed costs, variable costs, and semi-variable costs along with the revenue you expect to generate. This is also the most effective way to track your profit which is found with a very simple formula: revenue – expenses = profit. Bookkeeping Express helps readers understand the difference between these categories of cost. Fixed costs include costs that don’t change; they aren’t dependent on the activities of your business. These might include rent, salaries, or interest payments. Variable costs will often change depending on how your business’s activities change. Some costs in this category will include shipping costs or direct materials. Expect to adjust these throughout the year. Semi-variable costs are a combination of fixed and variable. Usually the base cost will be a part of every monthly/quarterly/annual projection but will fluctuate from there depending on business activities. An example of this would be commission-based pay. Once you know how your business breaks down into these categories, you can try to reduce fixed costs or turn them into variable costs.
2. Review your budget often
Some businesses have failed to revise their budgets for years at a time. This is a mistake. You should create your budget on a monthly or quarterly basis, especially when just starting out, and review it often. As your business becomes more established with a consistent cash flow, you may not need to make as many adjustments until you’re thinking about making another big move or suspect you could direct your revenue more efficiently. An article from Inc.com states that many businesses will keep an annual budget that they’ve broken down into 12 months. They will fill in the actual numbers for what was made and spent each month.
3. Be pessimistic in your estimations
When estimating revenue and costs, be pessimistic in both cases. Plan for lower revenue and higher costs than you would hope for. This will help you be more prepared for any surprises or setbacks. Jean Murray of The Balance mentions that this is especially important for start-up businesses which do not have a history of average costs and revenue to pull from. Existing businesses are able to pull more from past records to make realistic projections.
A plethora of electronic tools have emerged in the past decade to help you track your budget more effectively, securely, and efficiently. Whether it’s a simple Excel spreadsheet, a commercial tool with a built-in software bundle, or an accounting firm that specializes in helping truckers, coming up with a financial management strategy and utilizing the tools that are best for your business’s situation is essential to keep you on track.
Useful tools for managing business finances
Doing your own thing
Depending on the size and complexity of your business, it can be manageable to download your own template and go at it alone. Microsoft offers various budget templates for Microsoft Suite users. If you have Excel, you can download templates. They also offer premium templates that require purchasing Office 365. Simply searching around the internet for free, downloadable small business budget templates can be a fruitful exercise. Pick the template that makes the most sense for your strategy.
Using a software package
If you want to cut down on the time it takes to complete repetitive budgeting tasks like tracking miles, it could be worth considering using commercial software packages for managing business finances. Some of the most popularly used software for small and mid-sized businesses is available for low monthly payments. Quickbooks Online is a popular option that costs about $15 a month for the most basic subscription. Quickbooks Online can be managed online or through an app. As with other commercial accounting tools, some of the services offered include managing taxes, sending invoices, and, of course, tracking income and expenses.
Letting the professionals help
It can be in the best interest of your business to manage your financials with professional assistance. ATBS is an excellent option for this in the trucking industry. As an accounting firm that helps truckers with all tax and accounting related needs, owner-operator truck drivers as well as company drivers can utilize their services for budget creation and management. Managing a business on the road can be especially stressful and ATBS strives to help all truckers effectively manage their business finances so that they can build assets in their personal and business endeavors.
Some best practices for keeping up with bills when managing business finances
Develop your bookkeeping skills
In order to thrive, a small business must be organized, especially in their financials. In order to achieve this, create good bookkeeping practices. Bookkeeping includes keeping track of transactions: billing, recording receipts, recording invoices, etc. Many small businesses will do their own bookkeeping rather than hiring an external accountant or bookkeeper. Whether you prefer to do it yourself, use commercial software, or hire a pro, tracking your actual cash flow through bookkeeping activities is an essential element of every budget. Also, since good bookkeeping includes consistently recording all transactions, you have the info you need, organized and ready to use, for taxation.
Keep all bills in one place
Whether physical or online, you’ll want to keep your bills organized and in one place as much as possible. It’s possible you’ll have to juggle both physical and online bills. One way of dealing with this balance is to take pictures of all physical invoices and other documents and upload them to your online or computerized files. Another way to keep track is to keep a checklist for expected bills. Snail mail and even e-mail can be fallible and you don’t want to miss a payment because the request came in but you didn’t realize it.
Successfully managing business finances means avoiding unnecessary debt
It can sometimes be in a small business’ best interest to take on strategic debt. One CPA writes for Inc.com that this could be in the form of taking out a loan to develop a new service or when it’s cheaper than other financing options like taking on equity investors. Problems arise when unplanned debt or major financial setbacks occur for your business. The most common way to create unnecessary debt is being unaware of what reasonable spending looks like for your business because you aren’t tracking your finances with a budget. So, if you don’t have a budget, begin creating one now and stick to it as best you can. The same mistakes that lead people into personal debt can also spell trouble when repeated with your business. According to Investopedia, some of the most common pitfalls include unnecessary expenses, taking out a loan that is outside of your scope to pay back, failing to develop a savings plan and essentially living “paycheck to paycheck.” Developing an effective budget as described above can help you avoid many of these common issues.
Managing business finances does not have to be a stress-inducing, guessing game for you and your small to mid-sized business. By following these best practices, finding the optimal way to manage finances for your business can be an opportunity for learning, growth, and taking major steps toward meeting your business’s financial goals.
Continental bank offers a variety of financing options to small business owners all over the nation who are working on achieving their growth goals. Let us help take your financing plan to the next level!
