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Business Budgeting: The Essential Guide

a business owner accepting a credit card payment and including this in his business budget

Another way of saying a business has failed is by saying it simply ran out of money. New entrepreneurs often get so caught up in other priorities that they overspend themselves into bankruptcy. Countless failed businesses would likely still be alive today had their leaders maintained a budget.

Well, what prevented these entrepreneurs from establishing a budget early on? It’s possible that they viewed a budget as more of a burden than an asset. Harboring a negative perspective about budgeting makes it much harder to establish and maintain one. For this reason, entrepreneurs must view budgeting as a helpful tool for business growth and creativity. Making the most out of your budget can give you the resourcefulness every entrepreneur needs to succeed.

In this guide, we’ll answer the following questions and more:

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    What Are the Benefits of Setting a Budget?

    Believe it or not, saving money is just one of many benefits of setting a budget. Here are a few ways that budgeting can help you become a better business leader and improve your business’s overall performance:

    1. Knowing What to Prioritize

    Every day, entrepreneurs are faced with a myriad of short-term and long-term tasks. This makes it very difficult to decide which task should take precedent over another. Which should you focus on right now? Which can you afford to put off for a little while? Budgeting gives every element of your business a calculated label. Without this form of association, all responsibilities seem equally threatening. You’re more likely to act on your emotions as opposed to your intellect.

    For this reason, you should think of your budget as a right-hand man who you consult before moving forward with a task or expense. This allows you to be sure that you are spending your time wisely. After all, time is money. To maximize savings and revenue, you must spend most of your time on the most critical tasks. We’ll explain how later on.

    2. Stronger Connection with Employees

    A common attribute of successful businesses is transparency. There are more communication and fewer secrets. Your budget is no exception. Yes, some financial information should be reserved for management. But sharing your budget with your team shows that you have nothing to hide when it comes to spending. Employees will be less likely to question your strategic decisions since the logic is right in front of them.

    Sharing the budget can also facilitate suggestions from employees about keeping their division under budget. They may also offer suggestions for improving the division receiving most of the budget, now that this information is front and center.

    In summary, sharing a budget brings the team closer together and clarifies the business’s general strategy.

    3. Easier to Obtain Business Loans

    Alternative and online business financing companies have significantly looser business loan requirements than banks. But this doesn’t mean that just any business can get approved. One important quality these institutions look for in new borrowers is an established budget. This is how companies with poor credit or rocky cash flow can access business loans. They may have financial struggles, but they are aware of them and have created a budget to minimize the damage.

    To that end, maintaining a budget is essentially practice for repaying a business loan. Businesses with budgets understand that certain expenses automatically come with other expenses. They also know that when you earn more money (or have more money at your disposal), you have to spend more money, too. In other words, budgeting makes you more aware of how every new development impacts spending.

    4. Less Stress with Paying Taxes

    Taxes is one of the biggest headaches for younger and smaller businesses. If you don’t know how much you’ll owe for annual taxes like payroll, you’re in for a nasty surprise come tax season. You can avoid this massive stressor by incorporating estimated annual taxes into your budget. Luckily, several software tools can keep track of payroll taxes throughout the year and provide estimates for your total tax bill based on factors like profitability. You can imagine how much more productive you’ll be when you’re not constantly worrying about an unknown bill.

    Which Metrics Should You Track to Set Your Budget?

    Speaking of software, setting a budget is much easier today, thanks to the many tools designed for this very purpose. Still, every business leader should know which metrics have the most significant impact on their budget. Here they are:

    1. Monthly Spend

    Creating a budget becomes much less intimidating when you start small. Thus, your first metric to consult is how much your business spends on average in a month. Dissecting monthly spend shows where your money is going and exposes certain expenses as unnecessarily high. This is your starting point for making any operational changes related to your new budget.

    2. Profitability

    One of the main benefits of budgeting is increasing profitability. If you keep your expenses under wraps while increasing revenue, your profit margin will most likely increase as well.

    Since the budget has a direct impact on profitability, the measures you take to improve profitability will also help you stay on budget. You may find that it’s not expenses that are limiting your profitability. Maybe it’s taking too long to sell your inventory. Perhaps the majority of your revenue is coming in at the end of the month, only to be spent on recurring bills just days later. Taking measures to fix these problems can increase profits while simultaneously giving you more working capital to maintain your budget.

    Additionally, an increase in profitability is a pretty clear indicator that you’ve successfully stayed on budget while increasing revenue.

    3. Customer Acquisition Cost (CAC)

    Your customer acquisition cost (CAC) reveals the average dollar amount for acquiring a new customer. In addition to your budget, your CAC should determine the price of your offerings. It should also determine the efficacy of digital marketing campaigns.

    There are many formulas for calculating CAC. For the most straightforward method, all you have to know are your marketing and sales costs. Add those numbers and divide the total by the number of new customers you acquired within a specific time frame. You want your CAC to be as low as possible. But it would help if you accounted for factors like industry, business model, and anything significant that has happened to your business as of late.

    Some businesses spend thousands to gain around twenty new customers. Others, particularly those selling very cheap products, need their CAC to be well under a dollar to grow. Ideally, your CAC should only increase after you’ve released a new offering or taken some action to raise your profit margins.

    4. Cash Flow Available for Debt Service

    Your cash flow available for debt service (CAFD) is the amount you can pay for a new form of debt without damaging cash flow. In other words, this is the amount you have leftover after accounting for all additional costs. It’s just like profitability, except it’s a dollar amount instead of a percentage. As you can imagine, CAFD is extremely useful for determining the size and terms of a potential business loan. And you never know when you’re going to need extra cash. For this reason, every business should have money set aside if they have to pay off additional debt.

    What Are the Best Strategies for Maintaining a Budget?

    As you can see, budgeting affects several elements of your business. That’s why it’s no surprise that improving several aspects of your business makes it easier to stay on budget. Here are a few great strategies for creating and maintaining a budget:

    1. Pay Off High-Interest Debts

    The first step towards sticking to a budget is trimming your expenses. This includes monthly debt payments, like credit cards. Odds are, the credit cards with the highest interest payments charge the highest monthly payments. These are the debts you should strive to pay off as soon as possible. So, when creating your budget, see if you can afford to raise your monthly payment for your high-interest debts. The quicker you get these debts out of the way, the quicker you can grow your business.

    If you’ve been making timely payments for a long time, you could also contact your credit card provider to ask for a lower rate or a lower minimum payment. The same goes for your vendors. If they can’t offer a lower rate, maybe they can extend your trade credit for a few weeks so you can improve profit margins.

    2. Be Aware of Attached Expenses

    Your budget determines your spending capacity for new expenses. But as we mentioned earlier, many expenses are naturally attached to others. Think of the various expenses associated with full-time employees. It’s not just a salary. You must also account for benefits, payroll taxes, insurance, etc.

    Likewise, consider attached expenses when taking measures to improve profitability as well. For example, let’s say you plan on increasing profits by making more sales. But what about the costs of making those additional sales?

    3. Do More With Fewer People

    Saving money means doing more with fewer people. It is usually cheaper to train an existing employee to perform an additional task than hiring a new employee. The minor increase in the current employee’s salary would pale in comparison to the new employee’s full-time salary.

    For example, a restaurateur could pay his or her dinner crew a little more to stay later and clean the restaurant instead of hiring a private cleaning company. A retailer could pay a few sales associates a little more to manage inventory instead of hiring stock clerks.

    However, you won’t know which tasks your existing employees can fulfill unless you talk to them. Everyone has more they can bring to the table. While staying on a budget might limit your hiring capacity, it also creates the need to make the most out of your current team. It’s time to put that entrepreneurial creativity to work.

    4. Don’t Hire Unless It’s Necessary

    Speaking of new full-time employees, one of the most common mistakes in new businesses is growing too fast. This is mainly due to the outdated perception that you can’t get anything done or impress new clients without a big team. The general perception of smaller teams has changed. You don’t need a big group to be highly productive or impress new clients. And it usually takes several years to implement the systems and processes required for big teams.

    Hence, you don’t have to factor the cost of a big team in your budget. Even if your workload increases dramatically, you can probably handle it with just a few more full-time employees. But you should only bring on these employees when it is necessary. As we mentioned in the previous section, staying on a budget will remind you that new employees are rarely the solution to a new obstacle.

    5. Focus On Your Ads, Not Your Ad Budget

    The availability of data has changed the requirements of a successful marketing strategy. In the past, a successful marketing strategy needed a big budget that allowed the company to advertise as aggressively as possible. Today, on the other hand, you don’t need to bombard your audience with ads to attract interest. You have to make great ads. For this reason, it is entirely feasible to launch a highly successful marketing campaign with a minimal budget.

    If your competitors are increasing their marketing budgets by the month, you don’t have to feel compelled to do the same. Instead, focus on making your ads more tailored to the preferences of your target audience. You can also maintain your marketing budget by making sure you aren’t wasting money on ads that aren’t driving high-quality leads or sales.

    Which Small Business Software Tools Are Free?

    Believe it or not, some of the most popular software tools for small businesses are entirely free. Perhaps the best example is Google Analytics, which shows you whether or not your current marketing strategies are successfully converting website visitors into paying customers. You can see how much time people are spending on your website at different times of the day and whether they accessed your site through an organic search, an ad, or a website like Yelp.

    Other free tools include instant messaging service Slack, email marketing king MailChimp, and blogging platform WordPress. Many tools also offer very cheap paid plans, like social media management platform Buffer.

    Another Free Resource: Guidance from the Pros

    When you’re operating on a tight budget, you must resist the natural urge to assume that acquiring a specific tool or service will solve your problems. Odds are, you just haven’t executed the right strategy because you haven’t sought advice from the right people. And by this, we mean successful business owners who were in your shoes not too long ago.

    Thankfully, there are several avenues to forge relationships with veteran business owners. Local networking events take place all the time, and you can find out about them through your local Chamber of Commerce or networking platforms like Meetup. There’s a section of this website that’s exclusively devoted to small businesses.

    If you’re starting a local business, you should consider paying the small fee to join your Chamber of Commerce’s small business association. Members gain access to professional development workshops, the latest updates about the local economy, and even local demographics data.

    Another fabulous resource for business mentors is SCORE, which was initially started by the US Small Business Administration (SBA). This nationwide network is entirely free because the mentors volunteer their services. The only form of compensation they’re after is seeing their mentees succeed. Along with one-on-one mentorship, workshops and webinars are available for entrepreneurs at all stages of their journeys.

    Business Budget: Save Money to Make Money

    The timeless phrase “You’ve got spend money to make money” is losing relevance by the second. Instead, it would be best to concentrate on how you spend your time and making the most out of what you have. These are arguably the two most essential skills for entrepreneurs. An expert at either of them is a success story waiting to take place.

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