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What You Don’t Know Can Hurt You: Business Budget

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.

How to Create a Small Business Budget

Creating a small business budget helps you stay within your means and either remain or work towards becoming cash flow positive. A budget helps you understand what you have to use towards growing your business, purchasing new equipment and hiring new employees. Creating a sound budget will prevent you from accidentally overspending and can make the difference between your business staying afloat or sinking. Here are a few things to keep in mind.

Sales

In order to successfully create your budget you’ll need to review your income statements and see how much revenue your company is earning as well as necessary expenses. This will require that you estimate your future revenue based on figures over the last year. Your estimate should be conservative in nature and be a realistic portrayal of what’s achievable. If you are just starting out and haven’t been in business long enough to use data from the previous year, do some market research or speak to others in the same industry to create an educated guess.

Expenses

This part is just as tricky as estimating future sales. Factors like inflation, increases in price, and the need for more of a particular utility, service, or material can vary over time. These costs should be divided depending on their variability into categories such as semi-variable, variable, or fixed.

  • Fixed-These expenses remain the same regardless of the amount of product or service that you produce. Rent, insurance, leased furniture or car payments are good examples of fixed expenses.
  • Variable-This type of expense directly correlates to how much product you are producing and is a reflection of the materials used, freight or inventory.
  • Semi-variable-These costs and expenses may need to fluctuate depending on how your business is doing. They include items like marketing, salaries and telecommunications.

Profits

Profits are variable but can be estimated by subtracting your projected expenses from your projected revenues. This is the amount of money you have to expand your business, purchase new equipment or software, provide employees with bonuses or raises and add staff. If you’re uncomfortable with the calculated amount, contact an accountant, banker or trade association for their input.

Drafting your Small Business Budget

Your budget should be drafted for an entire year. Conservatively estimate your revenues and expenses for each month and list them in your budget. Calculate your gross profit by estimating the cost of the goods sold (goods purchased and/or manufactured, shipping charges, beginning inventory) and subtract it from your sales revenues.

Be prepared to make adjustments to the budget as necessary for things that occur over the course of the year like hiring employees, increasing sales and increasing costs. Should the economy change over the course of the year and result in reduced or increased sales, you’ll need to make an adjustment to your budget. For example, if you estimate that you will have revenues of $120,000 per year or $10,000 per month, but you’re only earning $9,000, then you need to change the monthly figure for future months to $9,000 or get on the horn and sell more products and services.

A budget is a plan and it’s a useful tool to keep you on track. Be sure to adjust it if you see trends that are either financially positive or negative. While this may seem a bit nerve-wracking at first, as you get used to creating and adjusting your budget over time it will become second nature.

Retirement Dreams Require Personal Financial Responsibility

This past year has undoubtedly been the best for the economy since the recession.Personal Financial Responsibility With new tax incentives kicking in, companies are finally seeing profits, where they were just barely, (often not at all) covering their expenses. The economy is expanding again, which is great for everyone involved, but it also means that many businesses are growing complacent. With cash on hand, they are paying off their bills and neglecting to prepare budgets, manage cash flow, and make projections about further growth.

It is this kind of attitude that is perpetuating a recessed economy. Small businesses must continue to plan for the future of their business and their retirement. Some of the recent economic growth can be attributed to the dispersion of bailout funds in the last four years. However, according to the August 2013 issue of The Kiplinger Letter, by 2016 that money will disappear. The economy will begin to shrink again and businesses will find themselves in deficit once again. By 2024, America is going to see interest payments on the national debt quadruple. That’s a serious cash flow issue, and why? Because saving has not been built into the budget. Don’t let this be the fate of your business and your retirement. Now is the time to plan for the success of not only your business, but for your retirement too.

Prepare a Budget with Future Deficits in Mind

Most companies already have a budget, at least a loose one. You know how much you have to pay in expenses such as, employee salaries, benefits, location rentals, lighting, insurance, etc. In general, you know how much money you have to spend every month in order to keep the lights on. In reality, you need to know exactly how much money leaves your account every month. Not only will this help you realize and eliminate waste from your spending, it will allow you to get a hold of your money and make it work for you.

Outside of the minor ups and downs that every business experiences, you need to be prepared for serious financial difficulties. Saving money isn’t just for individual households, as even the government has come to realize this year. Don’t spend every last dollar just because you have more dollars than bills this month. Next month or next year, the situation may be reversed. Think critically about where you can cut your budget and where you can save.

 Focus on Cash Flow

No matter what your business is, you probably have a good idea of where your money comes from and where it goes. You know your target market, and you know that those people are going to be the source of your income. Now, consider carefully how to tap that money source when you are seeing cash flow problems. In conjunction with formulating a living and budgeting, create a contingency plan that you can implement when sales are slow. Whether this is an aggressive marketing campaign or a new product or service, have a list of ideas and feasible enactment strategies that can help loosen your cash flow when money is tight.

Personal Financial Responsibility

If you want to retire you have to take personal financial responsibility for your business. We can help with cash flow management savings, preparing budgets, cash flow projections, and tying in your marketing plan with your business plan. When you create a good financial structure, your accountant will have less to give to the IRS and more to your bottom line.

Are you ready to live your retirement dreams? Preparation is key and we can help you get there. Call us today so that we can help you chart a better course for your business.

9 Principles for Securing Financial Peace for Your Small Business

Securing financial peace for your small business is important to your business, and due diligence is needed to reduce the chances that accounting errors or fraudulent activities lead your business towards failure.Financial Peace for Your Small Business  According to Dave Ramsey, most small businesses fail because of poor accounting, lack of budgeting, and debt. These might seem like basic tasks, but as many as 73.6 percent of small businesses fail after five years. Positive cash flow is essential, and it can make or break a business.

9 Principles for Securing Financial Peace for Your Small Business

If you want to succeed, consider implementing a few of these basic principles to secure financial peace for your small business:

  1. Keep Expenses Separate—Never comingle personal and business expenses. Deposit your business income and pay your expenses from your business account. You don’t need expensive business checks or an account with high fees. You can often open a business account with a few dollars, and eliminate fees by setting up a few bill pays online.
  2. Set Aside Taxes—When you pay yourself a wage, you’ll need to set aside money for taxes as well. A good rule of thumb is to set aside 25% of the amount that you withdraw from your account to pay taxes when they’re due.
  3. Budget—Every business should have a profit and loss statement for tax purposes. However, not every business has a realistic budget.  A budget helps you plan for the future and manage your expenses. It will serve as a barometer for how your business is performing, and you’ll be able to identify any seasonal or systemic problems that drain your cash.
  4. Act Your Wage—Don’t pile on the debt by buying fancy cars, new equipment, and expensive furniture for appearance purposes. Only buy what you need to keep your business running. As your wage increases, so can your toys.
  5. Eliminate Debt—Venture capitalists and investors favor companies that demonstrate positive cash flow. According to the Bureau of Census data, 60 percent of small businesses need less than $5,000 to get started. Start small and gradually expand as you experience more and more success.
  6. Save for Purchases—Systematically save for large purchases by setting aside a fixed amount every month towards the purchase price. If you can’t save the money, it’s likely that you won’t be able to make the payments either.
  7. Rent First and Buy Used—Rent expensive equipment until you can pay cash. When you save enough for the purchase, consider buying high quality used equipment to save money.
  8. Outsource—Outsource if you don’t have the skill or financial means to perform the work in house.
  9. Retain Earnings—You’ll want to retain some of your income for emergency expenses, a sudden loss of revenue, a great deal, or an investment in your company.

The easiest way to apply these principles is to develop an accurate budget and do a better job of accounting. You should also purchase only what your business needs to be successful, not just what you need for a tax break. How are you securing financial peace for your small business?  I’d love to hear your tips, and share them on a future post.