Just because you’ve opened a business, doesn’t mean you necessarily know everything you need to about how to run it, especially the financial aspects. No one teaches this!  Unless you have a finance degree, I bet no one ever taught you how to read a cash flow statement or create (and manage) a budget. Many companies tend to fail within the first five years, mostly due to poor financial planning and budgeting. Being able to understand estimates and match expenses to revenue is important because it helps business owners determine if they have enough funds to operate their business. Without a budget and plan, a company runs the risk of spending more than it’s earning.

Here are some steps to build a better business budget.

1. Check Industry Benchmarks

Not all industries are alike, but there are some comparisons. Google benchmarks for your industry to see what’s out there.  It’s important to do some research about your industry, learn what other businesses are doing, and checking the IRS website to get an idea of what percentage of revenue coming in would most likely be allocated toward cost groupings. Small businesses can be volatile as they are more susceptible to a slow economic turn.

2. Make a Spreadsheet

I love spreadsheets! Create a spreadsheet to estimate what total dollar amount and percentage of your revenue you’ll have to put toward raw material and other costs.  Do the same with rent, taxes, insurance, etc.  On your first draft, put in everything you can think of, you can always cut back.  If you need a great template to start, I have one – email me at judi.otton@growth-cast.com to get my template.

3. Factor in Slack

Although you may factor a specific revenue or rate of income, remember to estimate certain expenses that can’t be controlled or aren’t set in stone – like emergencies with equipment or liabilities.

4. Look at where you can Cut Costs

If money is tight, finances must be found somewhere to pay bills. If needed, consider cutting some costs. Another way to save money is to wait to make purchases until the start of a new billing cycle. With some careful maneuvering, you can create some breathing room.

5. Review the Business Periodically

While many businesses draft a budget yearly, owners should do it more often. Things change rapidly in the life of a small business owner.  You need to be reviewing your budget at least monthly.  First to compare your actual results to the plan, and second to make any necessary adjustments.

6. Shop Around for Services/Suppliers

Don’t be afraid to shop around for new suppliers, negotiate contracts on renewal, or to save money with other services being performed for your business. This can be done at many different stages of your business, including annually or during periodic reviews.

The Bottom Line

Budgeting is an easy, but essential process for business owners to forecast their future and current revenue expenses. The end goal is to make sure that there’s enough money to keep the business up and running – and ready to grow.

Need further help with preparing a budget for your business? I’m just an email away – judi.otton@growth-cast.com.

One constant challenge I hear from small business owners is that they can’t forecast their sales.  After all, how on earth are they supposed to know what’s going to happen in the future?  I have two answers to this.  1) you won’t get it perfect, but that’s still not a good reason not to make your best guess and 2) you have more information than you think.

Why should I forecast?

First let’s talk about why this is important.  You’re making decisions all the time about the future of your company.  Decisions about staffing (when and who), inventory purchases, equipment, location, promotions/marketing, and so much more are all based on assumptions about the future.  What if you had a little bit better insight into what’s likely to come?  Wouldn’t that help you make better decisions?  Of course, it would!

How do I create a forecast?

So how do we forecast?  If you have history, that’s a great place to start.  What did you sell this time last year?  Pay attention to any seasonal cycles.  If you’re a landscaper, winter is not going to be great for you.  If you own a restaurant, January may be slow. If you don’t have history, start slow, start conservative.  You may wish to sell a big number in your second month in business, but that’s not likely.  Start small and increase as you have greater success.  This will prevent you from outspending your income.

You likely have a pipeline – people or organizations that have expressed interest in your product or service.  At each successive stage of your sales cycle, your likeliness of gaining a new customer increases.  For example, you may close 25% of your leads, but 85% when you’ve gotten to the point of providing an estimate.  This can all be figured out from your sales history – if you’re keeping track.

You have goals and new initiatives.  Your business is not standing still.  You’re constantly improving, learning and growing.  If you’re launching a new marketing initiative, for example, what kind of increase in sales are you hoping for?  Take that into account as you’re creating your forecast.  Are you launching a new product or service?  How many of your existing clients can you sell it to?  When launching a new line of business, take into account the advice I offered about to new business owners – start small and increase as you see results.  You should also forecast your new line of business separately, so you can see if you’re meeting your expectations and adjust where necessary.

How do I use my forecast?

First of all, this is not a ‘one and done’ exercise.  Create a 12-month rolling forecast and update it at least once a month.  Include this as part of your financial checklist.  (you do have a financial checklist, don’t you?  If not, grab mine here (https://growth-cast.com/free-financial-checklist/).

Use your forecast to monitor the health of your business.  This is an important tool.  The financials that you get out of your accounting system tell you what happened in the past.  Your forecast tells you what to expect for the future!

If your forecast isn’t what you’d like, make changes.  If you need to beef up your sales or marketing, best to know that in advance, then wait until you have no customers.  If you’re going to need more staff, start looking now and that will keep you from having to ‘settle’ for whomever shows up when you’re busy and desperate.  If you’re going to need additional working capitol to fund all of your new orders or jobs, get that line of credit or other financing source in place now, so that it’s ready when you need it.

Having an up to date forecast is one of the few tools that helps you see forward as your navigating your business growth.  And seeing where your going makes for MUCH smoother sailing.

If you need help with this, feel free to schedule some time with me here: (http://growth-cast.com/book-me )

For your business to sustain long-term growth, you must understand what sets it apart from the competition. Identify why customers come to you with a product or service. What makes you relevant, differentiated and credible?  Figure out what special benefit only you can provide.  It is important to identify your ideal customer and continue to check in with this audience as you adjust the business to stimulate growth.  Changes must be measurable. If you’re unable to measure a change, you have no way of knowing whether it’s effective. Identify which key indicators affect the growth of your business, then dedicate time and money to those areas. Identify the potential for new revenue streams and determine if they are sustainable in the long run.

Look toward similar businesses that are growing in new, unique ways.  Your competition is likely excelling at something that your company may be struggling with.   Consider why your competitors have made alternate choices.  Focusing on your strengths, rather than trying to improve weaknesses often helps to establish growth strategies.  Making strategic decisions based on someone else’s successes won’t guarantee sustainable growth but it could help initiate a plan to resolve business inefficiencies, refine strengths and better suit your customers.

An important factor in business is the hiring of good people and trusting them.  Allow your employees to do their jobs and facilitate growth while you spend more time thinking about your strategic focus and opportunities.  Don’t forget your existing clients.  They could be your best path to expansion success. It’s usually much easier to find new business from current clients than to start with fresh ones.  Inquire with existing clients about how you can be even better.  Whatever you focus on as a growth opportunity, be sure it’s the right path for your business.  Don’t expand into new business areas just because you can.  Growth will not always bring a more profitable situation.  Be sure new business offers the same margins as you currently enjoy and helps you differentiate yourself from the competition.

Commit time to outlining a plan for your growth.  Outline a clear picture of your business’s current strengths, weaknesses and opportunities.  This should include a vision for where you want your company to be in the next three to five years.  Initiate an action plan to achieve your vision.  Your growth plan could be anything from a rough, informal sketch to a full-blown, highly detailed strategic plan, including everything from a mission statement to scenario planning and financial forecasts.

When it comes to an initial business plan, sometimes the simpler, the better. Even a short planned, disciplined approach to growth, will likely prevent easily avoided mistakes.  Solid business plans don’t guarantee success.  A well-written business plan attempts to organize qualitative and quantitative information in a way that guides decision making processes during conditions of uncertainty.  A solid plan should be used as a communication, negotiation and persuasion tool.  It should provide decision makers with enough insights to assist them in deciding the viability and feasibility of new ideas, strategies and initiatives.

I know I talk about budgeting a lot.  That’s because it’s important!  First, let me distinguish between two different terms – budgeting and forecasting.  Budgeting is planning the use of your financial resources month to month.  Forecasting uses historical data, comparing it to the budget, and making predictions for the future.  Both are very important to a healthy, growing business.

A budget is a tool used for planning and controlling your financial resources.  It is a guideline for your future plan of action, expressed in financial terms within a set period.  The budget must be flexible enough to anticipate that conditions might change – because they will!  Developing a budget can inform pricing, what inventory you will need, and the size of your staff required to run your operation efficiently.  Buyers and purchasing managers can utilize forecasting based on the budget to time their purchases for lower prices.  Budgeting and forecasting are also helpful for predicting sales and usage volume. It helps the managers know when to increase or decrease the workforce.  Management can also use forecasting to predict market changes that may affect their operation.

Creating, monitoring and managing a budget is key to business success. It should help you allocate resources where they are needed so that your business remains profitable and successful.  Determine projected sales for the budget period.  Be realistic more than optimistic; if you overestimate, it could lead to problems in the future.

Successful businesses often have a rolling budget, so that they are continually budgeting, e.g., for the coming twelve months.  If you invest some time in creating a comprehensive and realistic budget, it will be easier to manage and ultimately more effective.  Collect historical information on sales and costs if they are available – these could give you a good indication of likely future sales and costs. It’s also essential to consider what your sales plans are, how your sales resources will be used, any other new initiatives, and any changes in the competitive environment.

It’s best to ask staff with financial responsibilities in your company to provide you with estimates of figures for your budget – for example, sales targets, production costs or specific project control. If you balance their estimates against your own, you will achieve a more realistic budget. This involvement will also give them a greater commitment to meeting the budget.  Many small businesses have one overall operating budget which sets out how much money is needed to run the business over the coming period – usually a year.  As your business grows, your total operating budget is likely to be made up of several individual budgets such as your marketing or sales budgets.

Your cash budget projects your future cash position usually on a month-by-month basis.  Budgeting in this way is vital for small businesses as it can pinpoint any difficulties you might have in the future.  It should be reviewed at least monthly.  Sales or revenue budgets & forecasts are typically based on a combination of your sales history and how effective you expect your future efforts to be.  Using your sales and expenditure forecasts, you can prepare projected profits for the next 12 months. This will enable you to analyze your margins and other key ratios such as your return on investment.

Your budget can serve as a way of providing information and supporting management decisions throughout the year.  Comparing your budget year over year can be an excellent way of benchmarking your business’ performance – you can compare your projected figures with previous years to measure your performance.  You can also compare your figures for projected margins and growth with those of other companies in the same sector, or across different parts of your business, called benchmarking

To use your budgets effectively, you will need to review and revise them frequently. This is particularly true if your business is growing and you are planning to move into new areas.  Using up to date budgets enables you to track your progress, while remaining flexible and lets you manage your cash flow and identify what needs to be achieved in the next budgeting period.

Email me at judi.otton@growth-cast.com to learn more.

We all know that in order to grow, you’ve got to spend money. The challenge is, where do you get it from?

If you think you’re ready to grow, think again. The signs may have been positive lately: revenues are up, you’re selling more services, and work in coming in faster than you know what to do with. Maybe it’s time to grow your team with new hires, or even increase your marketing budget. Whatever you decide, you want to make sure the foundations of your business are solid enough for the increase.

Growing isn’t just about increasing revenues but increasing capacity as well, all while maintaining the quality of service your customers expect. Neglecting the fact that you’ll need to know where you stand financially and if you can handle the increase, has previously destroyed countless businesses before. Businesses have overspent on marketing and hiring, without knowing how to boost revenue – soon to run out of money.  Conversely, businesses that take on more business than they can handle often implode.

So, what’s the best plan to grow without access to more capital? Draw up a growth plan and fund it from inside your own business. Whatever you do, don’t max out your credit cards. Start looking for money any place you can.

One way is by factoring. Factoring is when a bank or finance company pays you for the invoices that you’ve already sent out. These invoices should have a return of 60 to 90 days, which at that time this particular factoring company can pay you a decent number of cents on the dollar. To find a company that’s right for you, research institutions that advertise in your industry’s trade magazines, that way you know that they’re familiar with your market.

Another way to get access to cash is to get an asset-based loan using inventory as collateral. A lender may find that your raw materials are more valuable, and lend you money against it. You can use the money to fund the production, using the proceeds from the finished product to pay off the loan. An unsecured loan, such as a Personal Line of Credit is also an option, but make sure you can repay what you’re taking out.

Depending on the type of business you have, you can optimize your liquidity in different ways. Such as persuading retailers to purchase your inventory up front at a discount, instead of paying you when they sell. You could even create an arrangement where a supplier only gets paid once you’ve been paid by your customers or retailers.

A different approach would be to see how your high-quality product can be manufactured at a fraction of the cost – that way it can be sold at a better margin. The relationship you build with your supplier can eventually give you better leverage to negotiate better terms in the long run.

In the end, it’s all about making sure every dollar you spend contributes to you becoming profitable. Nothing is more exhilarating than growing a successful business from scratch – wouldn’t you agree? You have to remember though that growing a successful business can take a lot longer than expected, and cost way more than you plan.

Ready to have a conversation? Email me at judi.otton@growth-cast.com.