A small business typically starts with the spark of a new idea or identifying an unmet need. Often, a well thought out budget can be overlooked in the excitement. Businesses can easily fail when they are a good idea but not financially grounded. At Fricke & Associates, LLC, we have helped hundreds of small businesses understand their finances and build out their long-term business plans. Our team can guide your business to establish the security and foundation it needs to grow and flourish in the years to come. A professionally built budget will help you make wise decisions for your company, cut out unnecessary spending, and find opportunities where you can grow. If your small business is ready to start a budget, remember these important steps.
· Evaluate Your Income Sources—You need to determine how much money your business brings in monthly. First off, add up all your revenue sources. Your revenue, also known as income, is the money your company earns each month before you deduct expenses. Profit is what you have after you minus your expenses from your revenue. For this step, you are only working on revenue, not profit. After you have calculated your income one month, look back in your records to determine your previous months as well. Ideally, if you can calculate your monthly income for an entire year, you will gain valuable information. Not only will you know your annual earnings, but you can also identify which months are the most and least profitable. Knowing which months tend to be slow can help you prepare financially for a slim month. For example, if your company sells winter apparel, you probably will have to budget to stay afloat during the warmer months when fewer people are searching for a thick parka.
· Determine and Deduct Your Fixed Costs—Your fixed costs are the recurring monthly expenses that your business will have to function. Examples of fixed costs could be rent, payroll, internet service, supplies, insurance payments, etc. Every small business will have different fixed costs, so make sure to evaluate carefully to ensure that you are able to calculate your monthly expenses properly. Once you have figured out all your fixed costs, subtract them from your monthly revenue.
· Assess Your Variable Costs—Variable costs may be essential for your business as well, but the cost each month varies based upon usage and needs. For example, if your company ships products to customers, your shipping costs could shift based upon your sales. Examples of variable costs could be traveling expenses, office supplies, utilities, marketing costs, replacing equipment, etc. Every company will have different variable costs, so look closely at your spending. You may have some expenses that are not truly essential that need to be cut back until your profits are up. Variable costs can be a part of growing and scaling your business, but you need to avoid overspending when profits are down.
· Prepare for An Emergency with a Contingency Fund—Almost without fail, unexpected expenses will pop up at the most inconvenient times. You need to plan for emergencies, so that your business will not fail because of something unexpected. Whether your cost is a broken down service truck, a dead computer, or a broken HVAC unit, your business will be in a better place to handle the emergency if you have a fund set aside. Spending excess income can be tempting but placing a portion in an emergency fund will help you be unphased when emergencies come.
· Make a Profit and Loss Statement—You have determined your monthly and annual income as well as your expenses. Now you can evaluate your profits and losses. Be prepared that not every month or year will be profitable for a small business, especially when you are getting your business established. Take your monthly revenue and subtract all the expenses, variable and fixed costs. If your result is positive, then you made a profit. If your number is negative, then you took a loss. Calculate your profit and loss for all the months in the year and then you can see which months were better than others. Also, if your overall year was profitable, then the losses were overcome. Even if your business has not been as profitable as you hoped, knowing the health of your business is important. If your business needs to improve revenue to be profitable, you can take steps to lower your expenses and increase your earnings. Our team of financial professionals will be happy to help you brainstorm ways to make your business more profitable.
· Establish a Budget and Follow it—Now that you have evaluated your income, expenses, and profitability, you can make a reasonable budget. Some businesses utilize technology to create and manage their budgets. You could also choose to enlist a professional like Fricke & Associates, LLC. We offer insight on establishing a reasonable budget and how to course correct if your finances get off track.
Fricke and Associates, LLC is standing by to help your small business establish a strong financial foundation. Schedule your consultation with us today!