Failure to budget effectively is one of the most common reasons for business failure. A healthy amount of cash capital is fundamental to success, but requires a delicate balancing act.
Even businesses that have no problem winning new clients can find themselves exposed to financial risk.
One third of UK businesses fail within the first three years, and cash-flow is one of the main reasons. The easiest and most effective way to reduce this threat is to put together a watertight budget.
What’s involved in a budget?
An effective budget must take all overheads into consideration, including:
- Cost of company premises, including all rent and utilities bills
- Staff costs: wages, benefits and pension commitments
- Ancillaries, including printing, postage and stationary
- Advertising and marketing
- Equipment and vehicle expenses
- Any likely travel and subsidence expenses
- Legal and professional costs, including business insurance
This should be calculated against projected sales, preferably factoring in contingency for both growth and rainy days. Based on these calculations, monthly or quarterly targets should be established.
Your budget can be a really effective indicator of how well your business is performing. By reviewing the figures at regular intervals it’s much easier to determine an accurate picture of actual income versus actual expenditure, and therefore analyse where money is being lost.
Once this has been identified, business practice can be adapted to reduce the deficit.
This is where regular targets are especially useful. If everybody is aware of what’s expected for the month, for example, it helps them to stay on track and quickly determine where improvements are required.
There should always be an element of saving written into the budget. Why? Well, there are a number of scenarios in which a business can find itself needing a cash injection, either to stay afloat or develop.
Unforeseen financial road-bumps might include:
- Costly equipment replacement
- Unanticipated accident or insurance claim
- Quick investment needed to service a new client
If reserves are already there, there’s less chance the business will need to incur debt.
There are two key ways to save; either a lump sum can be deposited for a pre-determined period of time with no access, or an account can be opened to make numerous deposits into throughout the year.
If possible, it’s sensible for businesses to put a fixed amount into a savings account every month as this will glean a higher rate of interest than in a current account and removes the temptation to spend.
Cash is King, and businesses must take care to retain capital. Taking care to budget properly is the first step to ensuring financial security for the future of your business.