Creating a smart and realistic budget for your business can be one of the best ways to keep it running smoothly. If your business has periods of difficulty or any setbacks, a budget gives you the protection and support to navigate through.
A smart budget gives you control over the financial health of your business which is one of the most important things which allows you to manage your cash flow limit , spending and set targets.
The most successful businesses are ones that are prepared and can adapt when necessary so smart budgeting should be seen as a non-negotiable.
Here are five useful tactics to help you implement smart budgeting and help your business not only survive but flourish!
1. Calculate your costs
The first step to creating a smart budget is calculating your costs. This is an important step in creating a realistic budget.
You will find this really easy to calculate if you have regular bookkeeping but if your business is new or your bookkeeping is an up-to-date then you can spend some time calculating this. If you research and run down the costs you may need as a new business then you could always overestimate and be slightly more cautious to start with if you require any assistance then please do just get in touch.
Costs fall into two main categories; fixed and variable.
Fixed costs account for things like rent subscriptions IT et cetera that are usually the same every single month.
Variable costs will fluctuate usually with the volume of your work whether you are a service or product based business you are still have variable costs. As a product based business, you will have raw materials and supplies such as power usage might vary. As a service based business you may have additional software costs, freelancer costs or other similar variables.
As a sidenote – it is also useful to have this figure in mind as your ‘zero income’ budget which can be extremely useful just to have the figure so that you know if your business received no more income this is the monthly costs that you would have and therefore you could also calculate how long your business would last with the current money that you have in the bank and other assets.
2. Estimate your revenue
Estimating revenue is one of the hardest parts of creating a budget we might need to do some additional research or ask for help. However, it’s important and worth time putting effort into creating this estimate as it allows to you to plan accordingly. you could look at creating worst- and best-case scenarios. This will allow provide you with motivation but allow you access to the figures to make safe decisions about your finances.
3. Work out your gross profit margin
Your gross profit margin is a measure of how much money you’re actually making. It’s important to calculate this figure regularly and keep track of your progress so that you can understand whether or not your business is growing, and at what rate.
To work out your gross profit margin, subtract your costs from your revenue. Then, divide this figure by your net sales to find the percentage of your margin. If this number is increasing each month, that’s a great sign. If it’s decreasing, it may be time to reduce your spending.
4. Plan for cashflow
Gross profit margin is important, but cash flow is equally vital to the health of your business.
It’s important to have an idea of how much money you’ll have available to you at different points during the year so that you can plan accordingly.
If you’ve been in business for a year or more, you can use past data to predict what your cash flow will look like each month. However, if your business is still in the fledgling stages then it’s time to do yet more research and look into trends within your particular industry.
5. Prepare for emergencies
Even the most successful businesses experience difficulties.
It pays to have a contingency fund set aside to keep your business safe should disaster strike.
Aim for your contingency funds to take the form of savings.
But whilst you build this up it’s also worth knowing about finance options available to you – for example a business credit card might allow for short term difficulties, lines of credit or other funding options might provide longer term support.
Smart budgeting can accelerate the growth of your business. It can help show roadblocks so you can plan to avoid them, help you decide on spending decisions and allow you to take full control of the finances in your business.
It is important that once you take the time to create and implement a smart budget that you also schedule regularly time to review and adjust to keep in control.
Get ahead, get it done.
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Thank you for reading this weeks blog – How do you create a smart budget to accelerate your business?