Businesses of all types endure natural ebbs and flows. Some changes are expected (like seasonal revenue), while other changes might be unexpected. The number one challenge faced by small businesses (82%), according to SCORE and the U.S. Chamber of Commerce, is cash flow problems. That’s where proper business budgeting comes into play - a key tool that helps business owners navigate the inevitable highs and lows of the business cycle. A business budget is very similar to a budget you might keep for your personal finances, though the former involves detailed and regular tracking of the cash flowing into and out of your business.
Let’s take a look at the steps required to effectively create a business budget:
- Understand your revenue: Any form of budgeting starts with calculating the revenue coming into your business during a given interval, typically measured on a monthly basis. Not only should you add up all your revenue for the most recent month, but it’s best to look back at each of the 12 months prior (or however many months you have data available if it’s less than a year) to account for any abnormalities and to identify patterns.
- Understand your costs: Now it’s time to practice the same for the costs your business incurs. These costs might include owner and employee salaries, office rent and bills, debt, taxes, supplies, retail orders, vendor contracts, and other regular expenses you can anticipate paying. Once you have a clear picture of both your fixed and variable costs, subtract this from your revenue to have an idea of how much your business is profiting (or losing) each month.
- Plan ahead: With these budgeting basics in place, you now have a tool to help guide future decision-making. If your business is in red, use this to identify focus areas where you can be more disciplined with spending. If your business is bringing in a regular profit, use your budget to decide the amount and the ways you want to use this cash to keep your business going strong. Whenever possible, it’s generally recommended to set aside at least three months' worth of expenses in an emergency.
- Forecast with confidence: While planning ahead is essential, the future is unpredictable, but you can make informed forecasts. A budget stress test allows you to evaluate the potential impact of significant changes in key variables, such as interest rates, commodity prices, and revenue fluctuations.
- Stick with your budget: It’s not enough to create a budget once and then rarely or never look at it again. Make it a habit to revisit your business budget at least once a month to ensure cash flow is in a good place compared to your expenses. Having a trusted team around you, including financial advisors and accountants, can help you execute an effective budget.
At its core, budgeting is a simple practice. But given the complexities of today’s business world and the range of expenses your business likely faces, budgeting isn’t always as easy as it sounds. Making the time and effort to diligently budget can pay dividends, so don’t brush this task under the rug.
It may also be helpful to consider budgeting software tools like Intuit QuickBooks or Xero.
Westfield Bank’s treasury management team is also here to support your business. Our tools can help you streamline and manage your finances with greater control, efficiency, and security. Typically linked directly to your cash flow cycle, these tools create practices that will ensure your business has:
- Greater cash flow visibility for forecasting and reporting finances, allowing for more informed business decisions and planning
- Simplification and optimization over your daily operations, from anywhere, with the convenience and flexibility of digital banking solutions
- Maximized your working capital and liquidity so that bills and other financial obligations are met while allowing room for investments or growth opportunities
- Mitigated risks with added security tools, like positive pay, to reduce or prevent fraud and prepare for the unexpected
It’s important not to overlook the significance of treasury management options as a tool for growth. Our team is here to maximize your cash flow, manage risk, and simplify your day-to-day operations.