Alarmingly, more than half of businesses fail due to inadequate funding or other financial issues. Although many of us understand that we need to be mindful of what we purchase, most of us don’t pay close enough attention to our actual budget. Overspending can create many additional issues for your business – issues that can be avoided by balancing your business’ budget.
Balancing your budget can be beneficial in many ways. It can help to reduce stress often caused by finances and help you to spot accounting errors sooner, allowing yourself the opportunity to fix them.
Here are five tips for staying on top of your spending.
- Take a look at the budget from the previous fiscal year.
It’s often said that people who do not learn from the past are doomed to repeat it. This isn’t any different for businesses. When it comes to planning and balancing your business budget, one of the best indicators of the future is the past. By taking a closer look at what went well – and what didn’t – you can ensure you have an accurate picture of the effectiveness of last year’s budget. Then you can plan accordingly. Be sure that every invoice, receipt, and any income are accurately added into your accounting system. Then reconcile your bank statements with what you have found. It may also be useful to create a variance report in order to examine the difference between what you’re budget actually was, and what you spent.
- Forecast this year’s expected income.
By studying last year’s income, you can more accurately be able to forecast this year’s expected income per month. By establishing what you expect to bring in each month, it will help to prevent overspending (or underspending to your detriment), and can provide you with a better estimate for how much you have to invest in products, business services, other business expenses, and human capital. Remember that income not only includes your hourly earnings, but also your savings, loans, and investments.
- Establish what you consider to be your fixed costs.
One of the easier tasks when balancing your budget is to establish what is called your “fixed costs.” Your fixed costs are those expenses that remain the same regardless of the business’ output. For many businesses this may be expenses such as rent or mortgage payments, website hosting, insurance, and employee pay. Although generally not possible, many businesses would ideally like to have all of their costs be fixed. This makes managing your budget much easier. However, calculating your business’ fixed budget isn’t always straightforward. While your fixed expenses are not likely to change over a short period of time, they may be different from one year to another. Companies raise or lower prices so it is very important to recalculate on a regular basis.
- Look at any variable costs.
Not as desired as fixed costs are your variable expenses. Variable costs fluctuate on a month-to-month basis and can be affected by each month’s income, either increasing or decreasing dependant upon sales. Therefore sometimes, increased variable costs may be a good thing. Variable costs include things such as credit card processing fees, shipping and handling of packages, and commission. Generally speaking, the more income you have, the more likely you are to increase your variable costs. You may also want to establish your variable contribution margin. This margin is the difference that exists between your variable costs and your actual revenue. This is executed by examining the prices of your services or products, seeing what the variable costs is, and subtracting the variable cost from the price. If this is too difficult, you may want to seek your accountant or bookkeeper.
- Plan for the unexpected.
When it comes to predicting business expenses, one thing that can almost always be expected is the unexpected. One-off expenses often occur without any notice and if you do not allow a financial cushion for such things, it can have a devastating affect on your business. Such expenses may include things such as replacing faulty equipment. That’s why it is best practice to maintain a percentage of each month’s revenue for what is called your “rainy day fund.”
What to Know Going Forward
Going through these five steps will be very helpful for balancing your business’ budget successfully. However, it is not enough to do so once. You cannot rely on one review, as expenses will likely change frequently. That’s why it’s a good idea to continue to review your budget within a fixed interval of time. Simply put, you cannot be spending more than you’re taking in. Whether it is daily, weekly, monthly, or quarterly, you always need to maintain awareness in order to be successful.
Calculating Destiny, LLC Can Help
At Calculating Destiny, LLC, we are a team of knowledgeable and experienced professionals that is dedicated to helping improve your business process. We work both on location and remotely, integrating into your existing team. Our ability to accurately and compliantly run your business allows you and your team to have a clear understanding of the challenges that may present themselves, how to overcome them, and how to set and achieve tangible goals. Through internal audits, process manuals, operations, and training & education, our number one goal is to help your company grow – even if that means outgrowing our services. To learn more about how we can help to put your business back on track for financial success, schedule a free consultation by visiting us online or calling us at 215-674-3430 today!