Financial Budgeting For A New Business
August 23, 2009
Did you know that cash flow deficiencies are the main reason most companies go out of business?
If you are seriously interested in making your business a success, then managing your money effectively is critical to the security of your organisation.A business will only remain successful in the current economic climate to the degree to which they understand how crucial it is to carefully monitor business expenditure to maintain a healthy cash flow. For example one of the companies I deal with, Softcat who provide the best Mimecast pricing deals, always scrutinise every cost we present to them, but this is one of the reasons why they are still around today and are able maintain a financially viable business.
When starting a new enterprise it might seem impossible to put together a budget without any financial history on which to base income and expenses. However a business plan, before you even start, with some idea of costs and revenues is essential to determining the viability of a business, even if you are just planning to setup a work at home business. It might seem like guesswork at the beginning, but a tentative budget can be established with some thought and projections of future business. From some past experience in renovating properties, I always say ‘think of a figure and double it’ and then you will be near the mark. I think this is true for other businesses, because it’s human nature to underestimate what we need to spend and over estimate what we will earn.
As all businesses have web design Nottingham also has two distinct areas of finance, business income and business expense.
Under the expense category there can be several sub-categories often falling into two main areas of controllable expenses and uncontrollable. While many business owners believe they can control every expense involved in their business, this is not always the case. Some things such as services costs, the amount of rent and other supposed fixed costs can, and do change, with the owner having no control. For example the recent increase in oil prices are an example of this and have been responsible for a number of small airline and transportation companies going out of business as their fuel costs skyrocketed.
Other expenses such as payroll, insurance and building repairs can be subject to a budget, but they are considered controllable expenses. If the business begins to fall off, you can control some of these expenses by laying-off employees and cutting back on advertising. However, living by a budget may help maintain profitability but could also turn against you in the long run.
Depending on the viability of your business it may be a better investment to bite the financial bullet on employee wages and still provide excellent customer service to the remaining customers until business picks up again. If no one takes care of the customers, it will not be long until there are no more customers to care for.
There are 2 ways to budget your business money and these are through set dollar amounts or as a percentage of income. Many businesses will budget their controllable expenses by the dollar and non-controllable by percentage of income. Obviously a good part of the owner’s time is going to be based on bringing money into the business and how much they have to spend on controllable expenses will be in direct relation to income. With any increase in business the owner will probably need the extra help to take care of the business so a percentage of income will go to more wages, thus freeing the owner to focus on generating additional revenue.
There are many other expenses that fall into the payroll account such as worker’s compensation charges, Social Security tax paid by the company and paid vacation time or other perks determined by the employer. These need to be calculated into costs when recruiting new employees into the business.
While you may think a budget is hard to establish for a new business, it is essential to establish a healthy and sound financial footing on which success can be built for the coming years.
About the Author: Roger Davies, is MD for web design company Advanta Productions, incorporated in 2004 to enable businesses in the Nottingham, Derby & Loughborough areas to successfully take advantage of Open Source solutions available and acquire the latest web technologies at affordable prices. For enquiries telephone 0845 2255 805 or visit the website.