Running a small business can be tough, especially when the economy feels like it’s constantly shifting beneath your feet. Whether it’s navigating supply chain disruptions, managing cash flow, or figuring out when to hire your next employee, staying financially prepared has never been more important than it is right now. And the best way to stay ahead of the game? Getting a solid budget in place.
Budgeting isn’t just about making sure you can pay your bills (although that’s a pretty big part of it!); it’s also about giving yourself peace of mind and the ability to jump on growth opportunities. In this blog post, we’ll chat about why budgeting is essential, some common challenges small businesses face, plus practical tips to help keep your business financially stable in a world that doesn’t always make it easy.
Why is budgeting important?
Before we share all of our budgeting tricks and tips, let’s take a quick look at why budgeting is even important to start with, especially for small businesses. Let’s face it — small businesses normally don’t have the luxury of unlimited resources. That’s why budgeting is vital.
A good budget allows you to:
- Plan for growth: Thinking about hiring a new employee or ramping up your marketing? Your budget can help you see if you’re truly ready to take the leap.
- Stay flexible: If the economy takes a downturn or your industry faces unexpected challenges, having a budget means you can pivot quickly without panicking.
- Handle surprises: Our parents weren’t kidding when they said that something always pops up! Whether it’s equipment breaking down or a sudden tax bill, a solid budget ensures you’re not caught off guard.
Without a budget, you’re basically flying blind. You might spend too much on things that aren’t actually critical to your business’s survival while neglecting more important expenses.
The common budgeting challenges small businesses face
You’re probably well aware that budgeting isn’t as simple as writing down some numbers and hoping for the best (we wish). Small businesses face some unique challenges when it comes to managing their finances, including:
- Unpredictable cash flow: This is a big one. Many small businesses — especially new ones — don’t have the luxury of a steady, predictable income. You might have months where you’re raking it in, followed by dry spells where money is tight.
- Unplanned expenses: Whether it’s a broken piece of equipment, a sudden uptick in the cost of goods, or unexpected legal fees, small business owners are no strangers to surprise expenses.
- Timing growth decisions: Deciding when to grow is tricky. Whether you’re hiring a new employee, adding a new product, or upping your marketing efforts, these moves usually require cash up front. But the payoff often takes time to show up. Knowing when you’re ready to take that leap requires careful planning.
Understanding these challenges is the first step to creating a budget that works for your business, and, more importantly, sticking to it.
Practical budgeting tips to help you stay on track
Now that we’ve covered why budgeting matters and some common pitfalls, let’s get into the juicy stuff — things you can actually do to make budgeting less painful and more effective for your business.
Budget for growth but be cautious
You might be eager to hire that first employee or launch that ad campaign, but before you take the plunge, make sure your finances are ready. A general rule of thumb? Have at least six months of operating expenses (including the new hire’s salary or marketing spend) saved up before you commit. Why six months? Because growth takes time. If you hire someone, there’s going to be a period where they’re getting up to speed, and they might not bring immediate value to your business. Same goes for marketing, your ads might not convert right away. Having that financial buffer gives you room to breathe while you wait for those investments to pay off.
Use the right tools for the job
If your business is relatively simple, a good old-fashioned spreadsheet might do the trick. But really, we’d recommend going for a software like Xero Analytics or Float, as they’re designed for businesses and can help you with cash flow forecasting. These tools can give you real-time insights into your financial health and help you predict when cash might be tight.
Prepare for unplanned expenses
We don’t mean to be all doom and gloom, but something will go wrong at some point. It’s just the nature of running a business. The best way to deal with unplanned expenses is to, well, plan for them. Set aside a portion of your budget — let’s say 5-10% of your monthly revenue — as a contingency fund. This way, when the unexpected happens, you’re not scrambling to figure out how to pay for it.
Stay on top of your outgoings
It’s easy to lose track of where your money is going if you’re not careful, so regularly reviewing your expenses is a must. Whether it’s rent, employee salaries, marketing costs, or software subscriptions, every penny spent needs to be accounted for. Tools like Xero offer reports that give you a detailed breakdown of your spending. By keeping a close eye on your outgoings, you’ll spot areas where you might be overspending and can adjust before things get out of hand.
Focus on cash flow, not just profit
A common mistake small business owners make is focusing solely on profits and forgetting about cash flow. You could be profitable on paper, but if you don’t have cash in the bank when your bills are due, you’re in trouble. Cash flow forecasting tools can help you predict future cash shortages so you can adjust your spending ahead of time. If you know you’ve got a slow month coming up, for example, you can delay certain expenses or ramp up your sales efforts to ensure you don’t run into cash flow issues.
What to include in your budget
Every business is different, but there are a few key things every small business should budget for:
- Operating expenses: Rent, utilities, and other overheads.
- Employee wages: Payroll, benefits, and taxes.
- Marketing: Ad campaigns, social media management, etc.
- Inventory and supplies: If you’re selling physical products, make sure to account for these costs.
- Software and tools: Don’t forget those monthly subscriptions!
- Debt repayments: If you’ve taken out any loans, budget for those repayments.
If you have questions about any aspect of your finances, please get in touch with the Trinity team. We’d love to help!
