Small Business Budgeting for Success
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BY Paul Smith
espite a global pandemic and one of the worst economic downturns in modern history, startup businesses continued to grow at a rapid rate in the United States in 2021. Although there are no final numbers yet at the time of this writing, new businesses starting in 2021 will almost certainly eclipse the record-breaking total of 4.4 million new businesses created in 2020 — the highest total on record and a 24% increase from 2019 (U.S. Census Bureau). These trends were reflected in the number of ND entrepreneurs and small business owners who requested assistance from the ND SBDC. The SBDC served a record high 1,800 clients statewide, a 20% increase over 2020 and an 80% increase over 2019. Unfortunately, we also know that not all of those businesses will survive. Approximately 20% of all small businesses will fail within their first year, and only one in two will be around in five years. Creating a financial plan and budget play a key role in small business success in every business stage but especially during the ‘existence’ and ‘survival’ stages. Poor cash
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flow management is a primary reason for business failure. That’s why it is critical for businesses to develop an annual budget and budgeting process. The budget acts as the foundation for the business’s financial decisions. It helps businesses predict incoming revenue, variable and fixed operating expenses and changes in cash flow, which may require strategies to reduce costs or seek additional outside capital, before they happen. That’s why it’s critical to create a budget that can set you up for success. Below are some budgeting mistakes that your company should avoid, along with a practical five-step budgeting process which you can implement to make your business more resilient. Common Budgeting Mistakes 1. Create a budget for only recurring payments Businesses often make the mistake of creating a budget that only includes recurring payments. Unfortunately, ‘surprise’ one-time expenses or certain onetime annual payments can hit, affecting company cash flow. Be sure to map out, plan and budget for those one-time expenditures.
2. Not planning for emergency costs Successful financial planning also requires building an emergency fund, which will help you survive a crisis. If you don’t plan for emergencies, your business can suffer. Similar to our household budgets, I recommend working toward having a safety net equal to at least three months of operating expenses. It may take some time to build sufficient cash reserves, but an emergency fund allows you to avoid going into debt just to pay for these unexpected yet necessary expenses. 3. Failing to track your spending Monitoring your expenses involves keeping tabs on your overhead during the month, and even daily. If you don’t keep track of your costs, you risk frivolous or impulsive spending, which may lead to a failure to reach your financial goals. Finding an effective method to track your expenses is critical, even if it's in a separate notebook or spreadsheet. 4. Not automating payments When trying to be responsible with your finances, the last thing you want is a missed due date. Not only is it bad for your credit, but it also results in late fees and additional charges. Unfortunately, this is a common