Long gone are the days when an entrepreneur could scribble a half-baked business plan on a napkin, hang out a shingle, and hope for success. Given today’s volatile economy and tight credit market, small business owners need to establish an ironclad business budget that maps out the company’s anticipated revenue, costs and growth.
“Without a budgeting plan, it’s difficult to project how fast you’re growing,” warns D. Alexander Washington, CEO of The Washington Consulting Group in Bala Cynwyd, Pennsylvania. His company provides financial planning and budgeting services to small businesses. “A plan is necessary to measure how and when you reach the benchmarks you’ve set, both mid-term and long-term,” he says.
Anna Phillips knows all about the importance of budgeting. As CEO of The Lash Lounge, a Texas-based beauty salon franchise, Phillips says, “I actually had to take a step back and look at what we were doing. We were chugging along day to day, trying to keep up with everything, but we didn’t have a vision for the future.” Just weeks away from opening a seventh location, Phillips now boasts a detailed budget that will take the franchise through the next five years and the launch of an additional 43 salons.
Here’s how to create a five-year budget for your small business that will help you manage the money your business is making, the money it’s spending, and the money it’s likely to earn in the future.
Calculating how much money your company is making—and spending—is critical to creating a realistic budget. But for many small businesses, seasonal changes and marketing fluctuations can have a significant impact on cash flow, making it difficult to cover capital expenses.
To better anticipate these dips, The Lash Lounge keeps a graph chart that “shows our franchisees, historically, when our busy times are and when we have slow times,” explains Phillips. “For example, when school lets out or starts up again, sales tend to dip down a bit. With the graph, we can prepare for slow months like June by ramping up our marketing efforts in May. That way our monthly cash flow stays relatively the same throughout the year.”
Pricing for profit
A small business owner can set his or her own price, but entrepreneurs have little control over how their suppliers price their products and services. Just ask Phillips. “The biggest surprise jump in price we’ve experienced is when a certain type of lash glue that we needed to provide our services went through the roof from $50 a bottle to $200 a bottle,” she recalls.
To better manage these variable costs, Phillips says she’s made a point of “negotiating accounts with vendors where, while prices may go up every so often, they are capped at a certain percentage.” What’s more, Phillips says making strong supplier relations a key component of a budget has helped her find new vendors with better prices on short notice and without any impact on the company’s bottom line.
Forecasting the future
It’s one thing to keep careful tabs on how much money your company is generating. It’s another to know how much you’re spending to keep your business afloat. But what about five years down the line? Failing to anticipate changes in inventory, pricing and consumer demand can stunt a business’s growth. For this reason, many small businesses deploy accounting software such as Intuit’s QuickBooks or Sage 50 Complete Accounting. Reasonably priced and easy to use, these programs allow small business owners to keep track of their daily growth numbers and to make sure they’re meeting their monthly targets.
Nevertheless, while software programs such as QuickBooks are ideal for budgeting, Washington warns that small business owners should feel comfortable using a particular solution before staging a full-fledged deployment. “There’s so much budgeting software out there,” he says. “You really have to pick what comes easy for you to understand.”
Many small businesses are so busy wheeling and dealing with suppliers that they forget about what is typically a business’s largest expense— its people. In fact, manpower—and its accompanying costs— should be a key component of a small business’s budget. That’s because young companies need to look at how many employees are needed to get the job done, how many new hires will be required as the company grows, and how these numbers are likely to fluctuate during seasonal changes.
Factors such as inflation can easily turn fixed costs into a variable nightmare. However, Phillips says it takes more than accounting software to avoid a cash crunch. “We’ve applied to be put on the SBA Franchise Registry so that when we go to the bank for a loan, we’re already on the list and they don’t have to do as much of an investigation,” says Phillips. “We’ve also started looking at alternate lenders to finance the business.”
It’s an approach Washington believes is wise. “The first thing a small business has to do is establish a banking relationship,” he says. “As a business owner, without proper financing and working capital, it’s difficult to operate. You never know when you may need more manpower or have to increase inventory on short notice. So know who your bankers are and establish a relationship with them—that’s the key to financial stability.”
Not sure how to create your own budget? The US Small Business Administration offers some great examples to help you get started.
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