Knowing how far into the future you can accurately plan your finances can be a tricky task. Forecasting your expenses for the next month is usually much easier than trying to predict what will happen a year from now.
If you find yourself throwing your hands up in the air when it comes to budgeting your books for the year ahead, it’s important to follow through and avoid letting yourself get behind. Just like driving at night, your car has high beams for a reason––don’t let obstacles jump out of the dark at you when it’s too late to swerve out of the way.
The best way to cover all the bases with your budget is to create two separate annual plans. An operating budget focuses your finances around profitability. This, more than anything is a way to track your overall growth from year-to-year.
For small businesses and startups, a second budget based solely around cash flow can be extremely useful for more careful monitoring of both what’s coming in as well as what’s flowing out. As we’ve said before, a poor balance of cash flow can put an expiration date on your business unless steps are taken to reverse it in time.
Paving a path to profitability
Focusing specifically on the operating budget, this plan also accounts for more than just what’s coming in over a 12-month period. In more concise terms, the incoming side of the equations projects your gross sales as well as net sales. Further than that’s it will give you a good idea of your net profits and loses as you move a year ahead with your business.
As far as expenses are concerned, a complete budget should account for a list of one-time expenditures you can see coming down the road. These kinds of items can often slip through the cracks and end up unaccounted for. It’s best to cast a wide net rather than wonder why your numbers seem light at the end of the year. A possible scenario where this could happen might involve a move from one office to another. Items like new furniture, office supplies, and other seemingly smaller expenses can add up quickly over time.
This budget will also account for essential ongoing expenses––most common probably being rent. Other ongoing expenses you may want to take note of are: personnel expenses (payroll tax), utility bills, insurance plans, licensing and any third party services like accounting and legal teams.
Perhaps the biggest boon in taking the time to lay out a complete operating budget is the ability to experiment with business variables. For instance, say you’re able to cut your staffing over the next two months, or set a higher price for your product as it appreciates in value. These scenarios can point you towards more realistic profitability goals, giving you a practical sense of when to expect your business to earn the profits you think you can achieve.
Ensure your growth is secured with a cash flow budget
Although it’s often ignored among small business owners caught up in other aspects of their budding business, establishing a budget just to monitor and project cash flow is an essential piece of the financial puzzle. For small businesses especially, this budget can actually tell you more about where you’re going in the short term than a budget based around profitability can.
If you’re unfamiliar with cash flow as a concept, it’s an important metric to understand. You can call your cash flow positive if you have enough money in the bank to pay off your bills at any given time throughout the year. This is the big difference between having a positive cash flow and being profitable. While the operating budget may lead you to believe your finances are stable since you can call yourself profitable, you may be paying for things in advance and waiting on payments that are accounted for but not yet in your books.
The first step for small businesses and startups
Unlike established businesses with a history of financial data to start a budget with, startups need to start from zero. Instead of looking back within your business, gauge a starting point with your budget by researching your industry in depth and compare competitors in your market.
In terms of measuring your costs, try to record your expenses as accurately as possible, and take any widely known market changes into account. If your business will fluctuate seasonally, try to get data that you can put together to account for dramatic shifts in business accordingly.
Lastly, it’s important to keep current on your budget and not simply seal it away every year after you’ve worked out a plan. Check it at least once a month to gauge how well your financial forecasts match your actual income and expenses. A well-crafted budget is a great tool for catching unforeseen problems before they become damaging.
If you’re looking for a reliable accounting or CFO service willing to work through your budget with you, contact our start-up accounting and CFO services experts.