Planning for a new year is always challenging. This is especially true for 2020, a year when economic and political uncertainty will complicate the outlook for every business owner. That said, planning your budget in advance can have a positive impact on your ability to pay bills on time, save for contingencies, make large purchases, or grow your business in the coming year.
Without a budget, business owners run the risk of spending more money than they are taking in or not spending enough to be competitive. Establishing an effective budgeting process will allow you to track cash and business expenses and determine how much revenue you need to fund or improve operations.
Whether you are making plans for expansion or looking to maintain the status quo, here are five steps you can take now to create the budget your business needs to thrive in 2020.
Step 1: Review Your 2019 Budget
Before you can plan for the new year, you need to analyze this year’s budget. Go through it line by line to determine how closely it matched your business’ actual income and expenses. Note where you came up short and where you might be able to spend less. Taking into account the previous year when planning a new budget will help guide you in making strategic financial decisions when it comes to operational expenses, new hires, and marketing.
Step 2: Project Your Expected Income for 2020
Develop a realistic estimate of how much money you expect to bring in each month. It’s important to keep your projections realistic. Overestimating can lead to overspending and quickly put your company in jeopardy; underestimating may prevent you from investing in new opportunities and limit your growth.
If you have been in business for a while, take your company’s most recent financial statements and use those business trends as the basis for developing your sales and profit targets. Take into consideration factors that might affect your sales numbers, such as seasonal trends, changes in the economy, or the loss of a major customer. Some business owners create multiple budgets in order to be prepared for different scenarios.
If this is the first time you’re creating a budget, estimate what you’d like to see the business generate in the coming year. You may have to make assumptions based on your geographical area, hours of operation, and by researching other local businesses.
Step 3: Tally Fixed Expenses
Every business has some expenses that are fixed year over year, such as payroll, rent, utilities, business insurance, and taxes. These line items should be added to your budget, along with less obvious expenses like professional association memberships, subscriptions, fuel, professional development courses, office supplies, printing, and shipping. While these expenses may not always be the exact same amount from year to year, you can estimate based on what you spent last year plus any expected rate adjustments.
Don’t forget to include planned expenses like property renovations, equipment purchases, or upgrading software systems. It is important to ensure there are adequate funds to cover the costs and that such projects are carefully timed to avoid burdening your business financially. Controlling expenses is critical to your company’s survival. If you start to see that your expenses are pulling even with your projected income, pinpoint unnecessary expenditures and look for ways to cut costs without sacrificing quality.
Step 4: Plan for the Unexpected
Unexpected costs can derail your business budget if you do not set aside contingency funds. From natural disasters and data breaches to equipment malfunctions and increases in supply costs, business owners must plan for the unexpected when putting together an annual budget.
Creating an emergency fund is essential to effective business budgeting. For many business owners, this is easier said than done. You may never have considered setting up a savings account because your budget is always tight. However, by shifting your mindset and treating savings as a monthly expense, you will slowly build a fund that can help your business stay afloat during a major disruption.
Once you have created your safety net, it’s important to manage it properly to ensure the funds are available when needed. Separate emergency funds from your other business bank accounts so you can keep tabs on exactly how much you have saved and avoid inadvertently spending the money elsewhere.
Step 5: Review You Budget Regularly
Staying within the limitations of your business budget isn’t always easy. However, financial issues for businesses are often the result of a lack of monitoring or the small but steady expenditures that build over time.
As your business changes and evolves, so will your budget – and you’ll need to be prepared to make adjustments based on your actual growth and profit patterns. For instance, you might land a new client that doubles your business and allows you to purchase new equipment or pay down business debt. Or a shift in the market may mean your sales figures are too high and you’ll need to make cuts in other areas.
Revisit your budget before the new year begins, then review it regularly to maintain a clear picture of your business finances. Many business owners evaluate their budgets monthly or quarterly. This allows them to make smart decisions based on concrete numbers, not hunches.
Investing in the future of your business means budgeting wisely and avoiding spending money needlessly. Summit Financial Resources knows that even the most disciplined business owner can experience a temporary budget shortfall. Whether you need working capital to purchase new equipment, expand your services, or invest in more efficient processes, we are here to help you maintain the financial health of your business.
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Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.