Yes, you have a great product or service that you are selling!
Yes, you have the passion to be a business owner and create your own destiny. But do you have effective financial management and strategic planning in place to ensure your business is set up for success?
Starting and running a small business can be quite an exhilarating journey. However, it comes with its fair share of challenges, especially when it comes to managing finances effectively.
The hard-hitting reality is that the survival rate for small businesses in Australia is low, with about six out of ten new small businesses ceasing to operate within their first 3 years. The most common reasons for business failure are inadequate cash flow and poor strategic & financial management.
In this blog, we will explore the importance of budgeting and financial management for small businesses and provide practical tips to help you navigate this critical aspect of your business.
The Significance of Budgeting for Small Businesses
Budgeting serves as a tool for effective financial management. By creating a budget, you gain a clear understanding of your income, expenses, and cashflow. This allows for a forward-looking view of your business which can then help you make informed decisions, allocate resources efficiently, and set realistic financial goals. A budget acts as a roadmap, helping you track your progress, identify potential issues, and acts as a strategic tool to adapt and adjust your business to stay on track.
Top Tips for Effective Budgeting and Financial Management
1. Have a Plan: Begin by defining your business objectives and setting specific financial goals eg Annual Revenue of $X or Profit of $Y. Project your revenue, expenses, and profitability targets by month for a full year. This plan will guide your budgeting process and provide a benchmark for measuring your progress.
2. Track Expenses: Track your business expenses and ensure that you put them into categories split between fixed expenses eg rent, utilities, salaries and variable expenses eg marketing, inventory, supplies. This split enables you to identify areas where you can reduce expenses or reallocate resources to optimise efficiency.
3. Look at Historical Data: Review past financial records to gain insights into your business’s spending patterns, seasonal trends, and revenue cycles. Analysing this data allows you to anticipate future expenses and allocate funds accordingly. If you are a new business, then you would need to begin to track this information to build this historical view over time.
4. Identify and Control Cash Flow: Cash flow management is crucial for small businesses. Monitor your cash inflows and outflows to ensure you have enough cash to cover operational expenses and unforeseen circumstances. Collecting cash from customers quicker and delaying payments to vendors or negotiating favorable payment terms can help maintain a healthy cash flow.
5. Let Technology help you: Create spreadsheets and use budgeting/accounting software to streamline financial management processes. These tools automate tasks such as expense tracking, invoicing, and financial reporting, providing you with real-time insights into your business’s financial health.
6. Regularly Review and Adjust: Dedicate some time each month to review your budget and financial statements. Compare actual performance against projected/budgeted figures, analyse the variances to your budgeted figures and understand the drivers behind these variances. You can then use this insight to adjust your budget as necessary to align with changing market conditions, business growth, or unexpected events.
7. Plan for Contingencies: Prepare for the unexpected by establishing an emergency fund. This will help you navigate unforeseen expenses or temporary revenue fluctuations without significantly impacting your business’s financial stability.
8. Seek Professional Advice: Consider consulting with a finance expert or accountant who specialises in small businesses. Their expertise can provide valuable insights and help you with strategic financial planning for your business.
In conclusion, budgeting and financial management are vital components for the success of all businesses, small and large. By implementing the strategies discussed above and maintaining a disciplined approach to your finances, you will gain control over your business’s financial health and set a solid foundation for long-term growth and profitability.
This blog was written by Financial Advisor and consultant Shomal Parekh and is a part of our WOMEN’S BUSINESS Series.
If you would like to learn more we have some up and coming workshops
The Realise Business team is adept at stepping in at all levels to meet business financial requirements. Our team has experience in managing finances for a wide range of industries. As a result, we can devise a tailored financial plan for a new business. If you would like to know more, get in touch.