Why Your Small Business Needs a Budget

Failure is a huge risk of small businesses. According to the U.S. Bureau of Labor Statistics, about 20% of small businesses fail in the first year, and 50% have failed by their fifth year (source.)

 What does every business need to continue? Cash flow.

Cash flow is vital to the success of a small business. The most successful ones are scrappy, and do what they can with what they have.

 The best tool to keep this in check is the budget.

 So much of our business training is geared toward financial statements: understanding the balance sheet, income statement, and statement of cash flows. These are all invaluable resources, but they are all indicators of past performance.

 Every business needs a budget, or a plan for how it’s going to spend money in the next year (or longer.) When you lay out projected revenues and expenses, there’s no denying the math. Then you can adjust accordingly to keep your business profitable and growing.

 Once you set a budget, you can have some fun. (If you’re a numbers nerd like me.) You can play with different scenarios, like…

·      How much more revenue would I need to hire help?

·      What would happen if we lost our biggest client?

·      How much do I want to pay myself, and how many clients do I need to make that happen?

 After you create the budget, it’s important to revisit it regularly. Analyze the variances between budgeted to actual revenue expenses. What happened? Do you need to adjust your budget going forward?

If you use an accounting software for your bookkeeping, chances are it has a budgeting feature.

The two I use, Quickbooks Online and Xero both have features to help you create a budget. This is the path I recommend rather than excel, since all of your accounting information is already in there! It’s practically as easy as a click of a button.

How to make a budget in QBO:

To create a budget in QBO, you’ll need either the Plus or Advanced membership.

Go to settings, then budgeting. Then Add Budget. You will be able to change settings such as the budget name, interval, year, etc.

From here your budget is ready for you to adjust. There’s easy features to enter a number in one column and with the click of a button, drag it across the remaining columns.

You can then run the budget as an overview or a comparison of budget vs. actual.

Here’s a snapshot of an example budget in QBO:

How to make a budget in Xero:

To create a budget in Xero, go to Accounting: Reports. Under Financial, select Budget Manager.

Enter your desired settings.

Xero has an option to copy the values exactly across all the columns, or adjust them by a certain percentage or dollar amount which I find very useful. For example, in the budget below I set it to increase revenue by 5% each month.

 Summary

Do you have a budget for your small business? If you’d like someone to talk it through with, I’m happy to help. Click below to schedule a free consultation.