Don’t Blow Your Budget.
Most people don’t like to think about budgets, let alone come up with a budget. As a business owner, especially a small business owner, understanding and controlling expenses is critical when it comes to survival. Here are six tips that can help you avoid blowing your business budget; the only way to excel in the business world.
Organize Business Expenses and Estimate Your Income
Whether you’re a new business or an existing one, it’s important to forecast your business expenses and estimate your income. If you haven’t done this before, review your expenses over the last year or two and look for trends and similarities. Based on what you’ve spent in the past, you can estimate what you think is headed your way and then overestimate expenses by at least 10% to play it safe.
To forecast income, review your sales pipeline and accounts receivables. Combine your average cancellation rate with a buffer of 10% or more depending on your industry to provide a conservative estimate of income.
Since cashflow is one of the biggest contributors to business failure, consider creating an account with money allocated to it for unknown expenses that are sure to pop up. You can always make adjustments to your budget down the road.
Assess and Allocate
Once you have budget numbers forecasted, walk away from them for a few days. Then, re-evaluate and make revisions with a fresh perspective. Make sure that you didn’t leave out important factors of your business including office expenses, entertainment, meals, marketing, taxes and payroll. At this point, if you’re using a budget software program, enter the numbers, projecting no further out than a year.
If your business is new, a six-month projection is fine. Then you can start working on allocating the expenses, placed into the standard expense categories as well as any unique to your business.
Monitor for Discrepancies
Monitor your budget as frequently as you can, but no less than once a month. The more you look at your accounts, the better informed you’ll be about the health of your business. Many successful business owners review their financials on a weekly or daily basis, which is easy to do given the latest software solutions.
Once you’ve set up your budget and begin to monitor it, you’ll find that there are certain to be discrepancies that need to reconciled. The sooner you deal with them, the better. If employees have access to your business bank accounts or have employee credit cards, you should set your system up to monitor their accounts as well.
Understand Taxes and How They Affect You
As with budgets, taxes can feel like another weight that’s bringing your business down. The truth is that if you do things right, there’s nothing to fear. Remember that taxes are both liabilities and expenses depending on the type. For example:
- Payroll taxes are liabilities and not an expense to the company because they’ve been deducted from your employees’ pay. The income tax is the employees; you’re simply withholding it as required by the law.
- Sales tax also is not an expense to the company, as taxes are collected from your customer and paid forward to the proper city and state municipalities. It’s your responsibility to forward tax payments to the property government agencies.
Although these aren’t expenses, you should be aware of them and recognize that the money you have in your bank account today is less than you think.
Understanding the Difference between an Employee and Independent Contractor
You can avoid a hit to your budget down the road by understanding the difference between an employee and independent contractor. If it’s found that your independent contractor meets the legal definition of employee, you could be required to:
- Pay applicable misclassified employee injured workers’ compensation benefits
- Provide employee benefits that include health care insurance, retirement and more.
- Compensate them for wages that you should’ve been paying them under the Fair Labor Standards Act, including minimum wages and overtime
- Pay back taxes and related penalties for state income and federal taxes, unemployment, Social Security and Medicare
Evaluate and Adjust
At the end of your budget’s projected timeframe, take the time to assess whether you’re under or over budget. This will provide you with much-needed insight into your business, and demonstrate where you can make changes.
Taking the time to understand your numbers now will help keep you from blowing your budget and will improve your numbers from this point forward.