Just like any businessperson, owners of small businesses also face the eternal issues of budgeting and cash flow. When we are talking about small businesses, it is safe to assume that money is almost always notoriously tight and good money management and budgeting skills are of utmost importance.
So with the problem of managing money in mind, we’ve decided to dedicate a few words for budgeting, especially in the context of small businesses.
Identifying the Essential Expenses
When we are talking about essential expenses, it is crucial to note that these so-called essential expenses can be relative to the company and its present situation. So, in that regard, let’s mention a few universally acceptable essential expenses such as wages, mortgage payments or rent, taxes and operational expenses such as utilities.
Cash Flow Projection
One of the most important things is to never over-estimate your projected market potential, especially in the first few years of operation. Incomes are extremely difficult to project, even for large corporations with near-unlimited resources, so it is extremely important to be realistic or even borderline pessimistic in your projections.
Yes, it is true that no two businesses are exactly the same, but similarities tend to arise when operating in the same industry and scale. This is why it is particularly important to study and understand your competitors and how other businesses tend to allocate their revenues towards servicing costs or debts.
A lot of small businesses tend to burn through their earnings as soon as their fiscal year or quarter ends. Although, there is nothing wrong with aggressively expanding your business, but it is extremely important to retain some of the earnings in the case of unexpected expenses. As a small business, the first priority should be capital preservation before all else and retaining a portion of the profits in a dedicated savings account could really make the difference in the future.
Deal with Debts
We all live in credit-based economies and of course there is nothing wrong with having some debts on the boo
ks. However, if left to its own devices, the larger interest payments might make it difficult to bring down the principal amount. The quicker you paid down the principal the less money your business will have to spend on servicing debts.
While there is no doubt that every single business has its own budget, the quality of their financial planning might not always be up to par, especially on the organization’s specific demands. Since, all small business owners have to constantly deal with financial planning and budgeting, we would love to hear some of your experiences in this domain. So feel free to post a comment and share your thoughts with all of us.