Budgeting for Small Businesses
How long would your business last if all income ceased to come in? If an unexpected event forced you to close your doors for a period of time? Exactly how far would your cash reserves go? Do you even have any cash reserves?
Finding the answers to these questions can seem impossible. The first step to understanding your cashflow is to prepare a budget. Preparing a budget can seem like a daunting task, especially if you are not a numbers person. The good news is, your budget doesn’t have to be perfect or “final” – you just have to start putting your “best guess” together.
The first thing to consider is the time frame for your budget – do you want to know what the entire year looks like, or maybe you only need to see 3 months ahead. Either way, the principles remain the same.
One rule I always stick to when preparing a budget is to UNDERESTIMATE revenue and OVERESTIMATE expenses. Always allow for those sales that won’t lead to cash in the bank – such as bad debts, cancellations and refunds. Conversely, expenses should have a buffer built in for unforeseen costs – such as repairs to equipment, legal fees and extra casual staff/labour.
Start with the total amount available in your business bank account right now. Add any expected income in the most likely period it will be received. For example, if your customers are due to pay you 7 days from invoice date, but you know that 30% of them always pay late, add this to your budget accordingly. Don’t forget to allow for bad and doubtful debts when determining what $ will come in.
From this, you will know your total available cash over the determined period. Deduct expenses in the appropriate period. For example, if you pay all your utilities quarterly, place the estimated total in the month you will be paying it – don’t spread the entire cost across the whole quarter – it will not give an accurate cashflow position. Add a bit extra to expenses to allow for those blowouts.
Remember, your cashflow budget is always a living breathing document that will need updating and reviewing on a regular basis. Nothing ever remains fixed when you are in business, so keep a close eye on the actual numbers vs your estimate and adjust as you go.