Since sales are never a constant over a year it is vital that small business owners really take a fine tooth comb to their finances and budget for both the highs and lows.
Here are some of our tips for smart budgeting:
1. Always overestimate your expenses. If you go over, you will have room to play. If, on the other hand, you are tight with your estimations, you can easily find yourself in the red.
2. Know your industry’s cycles. It is vital you factor in peak and off-season times – those designated periods of the year in which you can expect sales to drop or soar.
It is those troughs that can really cause problems in a business so squirreling away some of the peak-time income for those harder times is a key part of effective budgeting.
3. Prepare a risk analysis for the entire year. Like they say – knowing is half the battle and preparation is the best form of prevention. Take a look
at past years and trends and make sure that you factor in any trends, current and predicted. Again, always be conservative. Plan around the least favorable trend.
4. If you are in a project-based industry (architects, web designers, etc…) remember to factor in time. A common mistake is neglecting to factor in project delays.
Be aware of the time scales required to get each job done and set deadlines to ensure you keep on the right track. Missed deadlines should alert you to lost money and push you to revise your team and their work patterns. Remember, time is money.
5. Plan for large purchases early and with precision. Small, day-to-day purchases aren’t likely to put you in a pinch but an unplanned large purchase (think computers, plant and equipment, new hires) can definitely put you in hot water. Again, it’s best to overestimate.
6. Lastly, remember that budgets need to be flexible as well. That means they require constant attention and revision and will need to have flexibility built in.
This is harder than with other areas of your business plan as the budget should be as specific as possible. On the other hand, trying to plan down to the penny is unrealistic.