Small business owners make investments in their companies to gain market share and grow their income. While it’s sometimes necessary to spend money in order to make money, overspending can create profit margin issues and force companies to make unpleasant decisions about where to cut costs. If these issues remain unattended long enough, a small business can become insolvent.
Small business budgeting helps you stay on top of your finances, so you stay in business and expand your market share. You can set limits on your expenses that balance growth with sustainability. In addition, a budget can challenge business owners to get more creative with how they grow their companies and reach new customers. We will highlight some tips to get better at setting budgets and using them to expand your profit margin.
What Can You Do If You Have a Small Business Budget?
A small business budget lets you prioritize your expenses and more effectively allocate your capital. Small business budgets force business owners to recognize the opportunity cost of every dollar and become more selective with their efforts. When cash flows into your business, you can automatically distribute revenue across multiple bank accounts, with each bank account addressing one budgeting category. Segmenting your finances minimizes confusion and mistakenly dipping into one budgeting category to fund another.
The Importance of a Good Business Budget
Creating a reliable business budget has many advantages for small business owners. We have outlined some of the perks below.
Being Prepared for Emergencies
Emergencies happen, and they’re almost impossible to predict. When you need extra cash because of broken equipment, damage to your commercial property, rising demand for inventory, or any other reason, using a budget for financial planning helps you address emergencies sooner. You can get a business loan to cover emergencies and have the flexibility to make monthly payments.
Meeting Sales and Financial Goals
A small business budget does not imply your small business will slow down. Some budgets do the opposite. They contribute to your company’s growth because of how you use your revenue. You can monitor business performance across multiple sales and marketing channels and reallocate budget items to get closer to your sales and financial goals. Without a budget, it’s easier to spend money with less concentration. This mistake can result in wasted dollars that do not move you closer to your sales and financial goals.
Attracting Investment and Expanding Business
When you meet your sales and financial goals, others will take notice. Some people will invest in your company, hoping to earn alongside you. Capital from investors lets business owners grow more rapidly, address startup costs, and expand operations. For example, a brick-and-mortar business owner can suddenly consider a second commercial property if they receive enough investments. A small business budget can help you reach this point and expand your business in the years ahead.
Business Growth and Success
A small business budget protects your bottom line while having business owners focus more time on initiatives that contribute to meaningful revenue growth. As a result, budgeting can lead to business growth and help you achieve key milestones for your company.
Here are 7 Tips for a Better Small Business Budget
We have outlined some of the ways a small business budget can grow your company. Now, it’s time to create those budgets to realize these advantages for your small business. Check out these tips to improve your small business budget.
1. Track and Assess Business Spending
The first step to creating a small business budget is understanding your current finances. Review your business spending over the past year and calculate the ROI on those efforts. Business expenses that hurt your ROI took away from other spending categories that generated ROI during the same time frame. You can also identify and remove expenses that are no longer necessary, such as a subscription for software you stopped using for your business. Trimming expenses in unprofitable areas give you more money for profitable and proven areas.
2. Set Business and Spending Goals
Business and spending goals give us objectives and are aligned. Investing in your business can help you achieve business goals, but spending goals prevent you from going overboard. You can decide how much to spend each month or quarter on your budget categories. Monthly and quarterly spending goals keep you focused over a shorter time instead of lumping your expenses in the final three months of the year. Seasonal businesses should adjust their spending based on their busy and slow cycles. Seasonal businesses may spend more money on marketing channels during their busiest months of the year and cut back during slower months.
3. Prioritize Needs and Optimize Costs
Optimizing costs and identifying your priorities helps you get more out of every dollar you spend. This mentality reduces the amount of wasted capital that does nothing for your business. You should focus on budgeting categories that have the best ROI and align with your company’s annual goals.
4. Know Your Revenue and Gross Profit Margin
Historical revenue numbers help you understand how much your company is growing. Some businesses would be happy with 10% year-over-year revenue growth, while 30% growth would be unacceptable for other companies. The acceptable growth rate depends on your company’s industry, past performance, customer base, and other factors.
Your gross profit margin reveals the sustainability of your growth efforts. If you make $1 million in revenue but you spend $1.5 million to reach that level, you have an unprofitable and unsustainable business. Something will break if this trend carries out over a longer duration. Trimming unproductive expenses will improve your gross profit margin and allow you to keep more of the money that flows into your business.
Having a lower gross profit margin year-over-year isn’t always bad if your business growth translates into higher retained earnings year-over-year. However, if declining gross profit margins become a feature rather than a bug, you should look carefully at your small business budget and how you allocate capital.
5. Project Cash Flow
Cash flow lets your business operate smoothly so you can achieve future objectives. Cash flow helps you pay salaries, inventory costs, and other expenses. Using too much cash flow to cover expenses can put you in a squeeze and force you to make uncomfortable decisions and trim important costs. Businesses use cash flow projections to determine how much money they will have at the end of the month, quarter, and year. These projections make you less vulnerable to surprises that can strain your resources.
6. Negotiate with Suppliers
If you have worked with a supplier for years or know useful alternatives, you can negotiate with them for lower prices. Comparisons, the length of the relationship, and bulk orders can minimize your variable costs and create more room in your budget. You can only get more favorable prices on raw materials by asking, and if negotiations don’t result in lower prices, you will still get the same prices you pay. Negotiating with suppliers to get lower prices or a better bulk ordering option can save you money and has no downside.
7. Consider Seasonal Periods and Trends
Business demand ebbs and flows based on a company’s industry, location, and other factors. Ski resorts generate most of their revenue in the winter when snow is on the ground. Similarly, Florida tends to get plenty of snowbirds who want to escape the snow. Each business has seasonal periods; analyzing your data can reveal your company’s peaks and valleys. You can concentrate more of your spending during peak months when you can gain more traction from your efforts. Broader trends can also impact current revenue streams and inspire new project ideas.