I’ll never forget the day when I said to my wife, “Honey, I think it’s time we created a family budget.” The days of spending what we earned and keeping our fingers crossed every time we checked the bank account were over. We found out we were having twins and immediately went from a DINK lifestyle (Double Income No Kids) to a SIFTMP lifestyle (Singe Income Feeding Too Many People). Okay, I just made that last one up, but you get my point.
Although this was a realization my wife and I came to, a similar scenario plays out for many of you small business owners. It might have been the day you secured your first SBA loan, the day your first big order came in, or the day you hired your first employee. Regardless, there is always a point in the early stages of a small business when you realize that things have changed and you need to start planning and managing your finances. But who has time for financial planning when you’ve got a business to run???
For those of you who are ready to take the plunge, here is my advice to you:
Start small and stick to the basics. You are not Wal-Mart or IBM, so you don’t need fancy software or a Ph.D. A basic understanding of Microsoft Excel will be just fine. If you need a refresher, go online and spend a couple of hours learning the basics.
Start with the end goal in mind and work backwards. Ask yourself a few questions: What are you trying to accomplish this year? Do you want to grow your customer base? Build your inventory? Improve your credit score? Be honest about where you want to end the year, and then you can start to build an actionable plan to hit that goal.
Know thy business. Your business is unique; therefore, your budget should be unique. Getting tips and tricks from other small businesses is great, but don’t copy and paste what they do.
Categorize your expenses. For each expense, ask yourself the following questions: What is the point of this expense? How does this expense help me generate income? It is important to know how much money you spend on generating new sales leads vs. back office administrative activities. Don’t combine discretionary expenses (sending out a catalog to potential customers) and indiscretionary expenses (monthly payroll or a lease payment). It is important to know at all times what levers you can pull when cash flow is tight and where you can invest when things are booming.
Look backwards before creating a future plan. History has a chance of repeating itself, and anything that has already happened can be planned for in the future.
Iterate. A budget is an annual plan that is created before the year starts and is based on assumptions. There’s a good chance that major changes will happen soon and your budget will not be realistic anymore. Don’t throw it away and tell yourself you’ll try again next year. Make the necessary adjustments and use this new plan moving forward. This is called “re-forecasting” and is okay to do a few times per year. I recommend you keep the original budget stored somewhere just so you can pull it out at the end of the year and have a good laugh.
Break down your financial metrics into operational metrics. For example, let’s say you run a consulting business. Revenue is your financial metric, and your operational metrics are total hours worked, % of hours that are billable, and rate charged per billable hour. Operational metrics can always be added and multiplied together to calculate the financial metric. By tracking the operational metrics, you will not only know if you hit your budgeted financial metrics but more importantly how you hit them. You will have a lot more information about how to increase your revenue—work more hours, focus on less administrative work and more on billable hours, or work on more complex projects in which you can charge a higher rate per hour.
Think of your budget as your roadmap. You are at point A, you want to get to point B, and your budget is the path you take to get there.
Yes, a budget takes time to create and also to track during the year. But in the end, a budget will help you reduce anxiety. It will give you a clear assessment on how you are performing, and it will sound the alarm when you need to make difficult decisions to get back on track.
Have you tried of any of these tips to create a budget for your business? Share in the comments below!