Building a new business can be a daunting process in its own right, and that's even before you consider taking on your own budgeting and bookkeeping. Today, more than 80% of small businesses are unable to claim a profit because so much of their money is spent "re-investing" or paying off debt from previous capital investments. This system has proven ineffective and often leads business owners to become disheartened or to sell their companies before they ever really get off the ground.
Creating a Spreadsheet
Budgeting and forecasting are extremely difficult in the first couple years of business ownership. You likely do not have the information available to clearly forecast and determine the spending and investing costs.
The first thing you should do is create a spreadsheet that details all of your current operating expenses and your current incomes. You can also take the time to research other businesses in your industry and use them as case studies to figure out what you can expect.
Your spreadsheet will be the best way to check in on your small business budget plan month-to-month and make the necessary adjustments.
Regardless of what industry you are in, the best practice for successful savings and spending is to maintain multiple accounts.
For instance, if you have $1000 a month coming in and you plan on investing $2000 in new pizza ovens in the near future you still need to keep up with operating costs and try to avoid debt.
Assume that you are taking a 30% cut as the owner from the beginning. This leaves you $700/month for investing. Based on your spreadsheet you should be able to see your current operating costs at $500/month. That money can go into your spending account and the remaining $200 can go into a savings account for later investment.
By limiting yourself to $500 in the spending account, you will be forced to stick to your budget without going over and you will often find ways to reduce costs to stay under that number.
By putting the $200 away in savings for later investment, you can avoid picking up new debt, and you can add to the savings anytime your business performs better than expected to reach your goal faster.
You should be holding regular business budget planning sessions to review your spreadsheet and track your progress. While the actual ratio of savings to investing varies from one industry to the next, the reality is that writing everything down in a spreadsheet that you can compare to previous months, and holding yourself to a strict spending limit gives you a better ability to grow.
If you keep all of your money in a single account you are more likely to overspend just because the money is available and you will never learn to invest without debt. As your business grows you can adjust your percentages and allot money accordingly.
The ultimate goal is to ensure that the owner of the business is getting fairly compensated first, and then keep your spending and savings under tight control.
The more money you allow your business to have, the more it will willingly take. It is up to you to set limits and move money out of the way so that it cannot be spent. Large investments can be saved for, and monthly costs can be reduced just by choosing to set a limit up front.
At CapRock Services, we are proud to provide business solutions to thousands of merchants across the country. Please contact us for more information.