What Budgeting Can Do for Your Business
Many businesses that struggle with cash flow also struggle with budgeting. This correlation is important because it gives us an excellent starting point for how to consistently improve cash flow.
Budgeting can keep a business looking toward the future, which also helps with stability, growth, and building confidence. Creating and following a budget allows owners to make conscious financial decisions that will balance and stabilize revenue.
A budget keeps track of upcoming expenses and aligns it with income so a business can ensure its spending an appropriate amount of money. Companies that are cautious and stick to a budget are typically more successful than businesses that do not estimate their expenses in advance.
How to Put Together a Budget
Before we start the budgeting process, it’s a great idea to get a sense of your current cash flow challenges. Take our free cash flow quiz to see how your cash flow stacks up.
A budget starts by calculating income. Once you know how much money there is, you’ll know how much there is to work with to pay expenses. Head to your QuickBooks Online or other accounting software to look at your annual income. How much money did you make last year? Are there swells and dips throughout the year that are consistent with the year before?
2. Fixed Expenses
The next step is to determine what your fixed costs look like for the year. These include items such as your office rent or mortgage payment, insurance, taxes, debt, payroll,
supplies, subscriptions, and any other bills needed to be paid either daily, weekly, monthly, or yearly.
Again, you can head to your accounting software to look at past expenses and gain a better understanding of your fixed expenses. In QuickBooks Online, it’s possible to categorize expenses, which makes them searchable. For instance, you could search for all vehicle expenses for last year and easily see a breakdown of what you spent in this category.
If you need accounting software training in Edmonton from professional accountants, reach out and get in touch!
3. Variable Costs
In addition to fixed costs, you’ll need to determine your variable costs. This may include items such as shipping, utilities (electricity and gas), travel, and commission paid to sales associates.
4. Account for Unexpected Expenses
The most difficult part of budgeting is that it can be difficult to predict all of your expenses in advance. Perhaps your business is suddenly in need of a new computer for a new employee. Maybe there is an electrical problem in the building that needs repairs. Or, maybe you have a great opportunity for a project, but you need extra cash to purchase materials upfront.
All of these costs can come up unexpectedly, so be sure to leave a reasonable amount of room in your budget for these types of events. It’s also a great idea to have extra savings tucked away somewhere as a cushion in case these events greatly exceed your budget.
Now that you have all of the necessary numbers and information about your expenses and income, it’s time to implement your budget. It’s best to break it down into manageable chunks so you can track your income and expenses; many businesses choose to use a monthly budget. There are plenty of digital tools and apps, or you can even use a simple Excel spreadsheet.
Where to Focus Spending
A budget helps you make financial decisions. It gives you a clear visualization of where and how your income is being utilized. It can also give you an indication of spending habits and patterns. Once you add up all your shipping costs, for example, you could realize that it’s adding up more than in years past, and it’s time to look for other providers or lower-cost options.
Your budget magnifies these transactions in a way to help you articulate and make sense of spending needs. This will help determine where spending should be focused on moving forward. You might have to cut out a variable cost of some kind that isn’t as essential to your business in order to save money and increase financial growth for the future.
This is yet another reason to properly categorize your expenses in your accounting software. If you aren’t sure how to set up categories or optimize your tracking, check out our QuickBooks Online setup guide.
How Much Should My Business Be Saving?
A budget can keep your cash flow on track, but it can also help you make decisions about savings. A good month of profit might give your business some extra money to spend on variable expenses or one-time cost items (such as enhancing your office space). However, it might also provide an excellent opportunity to build savings and investments in the business.
As mentioned above, it’s important to have a cash reserve on-hand for expenses that pop up unexpectedly. A good rule of thumb is to always have enough stashed away to pay expenses for three to six months. This all depends on the status of your business income, which is different for every owner, but either way, a budget will give you a great indicator of your first savings goal.
Get Advice from a Financial Professional
At Schwan & Associates, we understand the cash flow challenges many businesses in Edmonton face. We offer fair package deals to our prospective customers, with features tailored to any business looking for hands-on financial services. Get in touch with us today and schedule a consultation!