“It takes as much energy to wish as it does to plan.” – Eleanor Roosevelt
We’ve written about cash flow before; it’s the lifeblood of your business. Every business owner knows that cash is critical to their success, but almost none of them have a plan for managing it.
There’s a name for that plan: a budget.
We are surprised at the number of smart business owners who don’t have a budget for their business. A good budget is more than a dry document that tells you how much money it takes to run your business (although that’s an essential and useful function.) A budget helps you understand the health of your business and helps you make important decisions.
When you’re lost and you consult a map in a park, where do you start? You start with the “YOU ARE HERE” marker. That’s the first thing a budget tells you. It’s a realistic look at your current financial situation. You can’t know how long it will take you to reach your goals: build wealth, expand the business, or prepare for retirement, unless you know where you stand right now.
We know creating a budget can be daunting if you don’t know how to do it. Fortunately, we do. We start with the known expenses, which some business owners have never listed together in one place. These are what it takes to run the business every month: rent, utilities, automobiles, payroll, insurance, subscriptions, and marketing. If the business is new or we just don’t know the exact number, we use a formula as a placeholder (we use 2 percent of gross revenue as a rule of thumb for a marketing budget, for example).
Cash flow budgets are different than Profit and Loss budgets because they include debts you must service. So we include loan payments, past taxes, and other debts that must be accounted for in your cash flow.
When we’re finished, we know what it takes to run your business for the month. Now we can take a clear-eyed look at what you’re bringing in each month and get an idea of how healthy your business is. If it takes $8,000 a month to run the business and you’re only selling $6,000 worth of product, you’re in trouble. But now you know exactly what you need to do – bring in at least $2,000 more each month to survive. Now that we know what you need to make each month to break even, we can also budget in savings for retirement or other goals, so you know exactly what you’ll need to put away—10 – 20% every month. Without the budget, you can’t create a plan that makes sense.
Of course, a budget isn’t worth the paper it’s printed on if you don’t work it every month. We help clients compare their monthly activity to their monthly budget to see how they’re performing. Do they need to increase sales? Do they have variances we didn’t expect? How can we correct course?
And of course, there will be variances. You may get a new revenue stream and need to hire another staff member. Equipment breaks. Technology has to be replaced. Stuff happens. But you’ll be able to make informed decisions because you are managing your budget. You know what you can afford to spend or where you can afford to make cuts.
Another advantage of a budget is that you can view your expenses as a percentage of your revenue. If you’re spending 50% of your gross revenue on rent and utilities, you’re paying too much—way too much—and you know you’ll need to prioritize a search for a more affordable location. We have common-sense guidelines for expense categories as a percentage of gross revenue, so we can look at where you can make reasonable cuts to increase your profitability.
Having a good budget means you’ll also be able to see where you stand this year compared to last year. Are you growing your revenue enough to expand your business? If you need a line of credit or want to take out a loan, you can’t begin the process without a budget in hand. Every lender needs to know you can service the debt you’re taking on.
There are plenty of unknowns for a business owner. You might not know how much you’ll sell next month. But you should have a really good idea of how much you need to sell next month to keep the doors open. Knowledge is power, and we help our clients gain the knowledge they need to succeed.
About Andrea Bone:
Andrea Bone is the Founder & CEO of Accounting & Business Partners. As a hands-on controller for multiple businesses of various sizes from 1995 to 2021, she has been responsible for all the “back office” operations. Her firm manages accounting, payroll, human resources, taxes, banking, insurance, and legal work. Her favorite part of working with business owner clients is seeing them achieve their goals.
Andrea holds a Bachelor of Science in Accounting from the University of Texas at Dallas and a Master’s degree in Business from Texas A&M University Corpus Christi. She is a Certified Public Accountant and has over 25 years of experience running businesses as a financial controller and CFO.