According to a CB insights study, some of the main reasons why small businesses fail include pricing and cost issues, loss of focus, and running out of cash. These problems can be prevented if you have a realistic budget. However, before you can focus on budgeting, you need to identify which aspects of your business you would like to improve. This will allow you to decide what can be done with your funds. Based on that list, you can set short and long-term goals.

These goals will be directly affected by your money in and out. A short-term goal could be to pay off debts or purchase new equipment. Long-term goals, such as putting aside marketing expenses, are critical because they are linked to the overall growth of your business. You have to be practical with the goals you have set for yourself. They should be based solely on your company's ability to spend and save.

Once you have set your goals, you can create an effective and foolproof budget by following these steps:

1. Analyze the costs

Before you start writing a budget, you should research the operational costs involved in your business. Knowing your costs inside and out gives you the basic knowledge you need to create an effective spending plan.

If you create a rough budget and then find that you need more money for your business, it will jeopardize your goals. Your budget should be such that you can increase your income and profits as your business expands to handle your growing expenses.

Your budget should take into account fixed, variable, one-off, and unexpected costs. Some examples of fixed expenses are rent, mortgages, salaries, the Internet, accounting services, and insurance. Examples of variable costs include the cost of goods sold and labor commissions.

There is not much harm in overestimating the costs involved, as you will need enough cash to manage your future expenses. If your business is new, you should also include start-up costs. Budgeting in this way will help you make informed decisions and deal with any unwanted financial surprises.

2. Negotiate costs with suppliers

This step will be useful for those companies that have been operating for more than a year and depend on suppliers to sell products. Before starting your annual budget, talk to your suppliers and try to get discounted rates on the materials, products, or services you need before making payments.

Negotiations allow you to build trusting relationships with your suppliers. This will come in handy when the incoming money is limited. For example, you might have a seasonal business. When you have enough money saved, you can prepay your suppliers as compensation for times when you can't make payments. The main focus here is to find efficient ways to reduce the costs of doing business.

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3. Calculate your income

Many businesses have failed in the past by overestimating revenue and borrowing more money to meet operational needs. This defeats the very purpose of creating a budget. To keep things realistic, it's a good idea to look at previously recorded revenue. Businesses must regularly monitor revenue on a monthly, quarterly, and yearly basis.

The earnings data from the previous year can serve as a reference point for the following year. It is important to rely solely on this empirical data. This will help you set realistic goals for your team, which will lead to the eventual growth of your business.

4. Know your gross profit margin

Gross profit margin is the money you have left after your business has taken care of all expenses at the end of the year. It gives an idea of ​​the financial health of your business.

Here is an example of why you need to understand this parameter when creating a budget. Let's say your company has earned N 5,000,000 in revenue, but there are debts to pay. At the end of the year, your expenses exceed your income, which is not a good sign for a growing business. This tells you to identify expenses that are not benefiting the company in any way and eliminate them. The best way to do this would be to list the cost of goods sold for all materials and deduct it from the overall sales revenue. This information is needed to get a real picture of how your business is doing, allowing you to increase profits and reduce costs.

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5. Know the cash flow of the project

There are two components of cash flow: customer payments and vendor payments. You need to balance these two components to maintain cash flow in your organization. To do everything possible to ensure timely payments from customers, it is important to have flexible payment terms and the ability to receive payments through common payment channels. Unfortunately, you will have to deal with clients who may not be able to meet the stated terms. This could affect the cash flow forecast due to missed payments.

You can encourage payment by giving customers a grace period and creating strict company policies for late payments. On top of that, you should have some money set aside in your "bad debt" budget, just in case the customer never pays.

When you know your cash inflow, you can set an amount for your employees' salaries and travel expenses. You can also set aside money to pay for your supplier's overheads. If you still have money left over, you can spend it on business ventures like career development or new equipment.

6. Be aware of seasonal and industry trends

It is unrealistic to expect that you will achieve all of your business goals and estimates every month. In an annual cycle, there will be months when your business is booming and there may be a few months when sales will be slow.

Due to seasonal inconsistency and industry trends, you'll need to spend money effectively, so the business doesn't risk going out of business during slower times. To overcome this challenge as you create a budget, gather information on when your business is performing best.

The goal should be to generate enough revenue during the peak months to keep the business going during the off-season. For example, let's say you own a winter clothing business. Their products are only in demand during that season, so most of their income comes from that period. During the rest of the year, you can use the profits to keep the business going and market-specific target groups, such as hikers or travelers. This will help you gauge how successful your products are during slow seasons, what revenue to expect, and how much to save during peak periods.

7. Establish spending goals

Budgeting is more than just adding up your costs and subtracting them from your profits. How wisely you spend your money determines how well your business will perform. Goals provide a way to see if your money is being spent in the right areas to avoid unwanted spending.

For example, if you're spending money on stationery that isn't used for operational or marketing purposes, it might be time to cut those costs. This money can be better applied to your marketing campaigns, generating more leads and revenue. Calculate and invest in those expenses that would benefit your business in the long run.

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8. Bring it all together

Once you've gathered all the information from the previous steps, it's time to create your budget. After subtracting your fixed and variable expenses from your income, you will have an idea of ​​how much you can work. Be prepared for unexpected one-off expenses that come your way. You can then find ways to use money effectively to achieve your short- and long-term goals.

Budgeting is an essential process, especially for small businesses, as it allows entrepreneurs to estimate and allocate money for different businesses. Preparing a budget also gives you a clear idea of ​​the money that can be used to achieve business goals and ensure there is enough to handle a crisis.

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