According to SBA What’s New With Small Business, there were 414,000 startups and 396,000 closures in 2015 (BDS). In Georgia, there are one million small businesses and the annual growth rate was 3.2% in the third quarter of 2017. Which was slightly slower than the 3.4% growth rate for the U.S (BEA).
Most businesses fail within five years for financial reasons. According to a study by U.S. Bank, “82% of the time, poor cash flow management or poor understanding of cash flow contributes to business failure”. Budgeting is a vital part of establishing and maintaining a business.
- 79% – Starting out with too little money
- 78% – Lack of a well-developed business plan, including insufficient research on the business before starting it
- 77% – Not pricing properly or failure to include all necessary items when setting prices
- 73% – Being overly optimistic about achievable sales, money required, and about what needs to be done to be successful
- 70% – Not recognizing or ignoring what they don’t do well and not seeking help from those who do
Based on our experience we have developed five keys to business budgeting to set you up for success.
1. Grass Roots Approach
You hired your employees for their expertise. So use it. A grassroots approach helps build a strong company culture and it provides insight from various perspectives that you may not have even considered. We find employees are more engaged and eager to accomplish goals that they participate in setting. In addition, your employees may have connections that can assist in locating better pricing.
2. Create Benchmarks based on Industry Standards
Business varies by industry. So it is important to do your research. Plus this will provide a foundation for developing your performance indicators. Other valuable resources include the IRS website, Thomson Reuters and NAICS. We also recommend talking to fellow small business owners in your community to help provide a more practical understanding of your local business ecosystem. It is important to set a standard for your business from the top down. You must lead by example and create clear expectations with benchmarks and then develop plans and a process to ensure everything remains on track.
3. Build a Financial Model
The best way to explore the highs, lows, and plateaus of your business is to develop a financial model. Excel is the best tool we have found for financial modeling. Then all you have to do is input certain key figures and Excel does all the hard work for you. The benchmarks you researched above will serve as your historical financial data in the first financial model. As your business grows you can import your actual financials into the model to improve accuracy. Standard financial models include historical financial data, assumptions, and forecasts from the income statement, capital assets, financial activity, balance sheet, and cash flow statement. Later on, this will be very important for business projections especially if you plan to solicit investors.
4. Include a Reserve
You are excited at the potential of your new business and sometimes that optimism is different than reality. It is important to be somewhat conservative as you build your budget and continuously build and maintain a cash reserve. To prepare for the lows you need enough cash to cover expenses such as utilities, payroll, and benefits. If you have to reduce payroll to cut expenses that turnover can be costly. So plan ahead and have a cash reserve. Hopefully, you will never have to use it.
5. Solicit Feedback
Sometimes we think we have a great idea, but after we discuss it with someone it does not seem as good as we originally thought. It is also difficult to see your own mistakes. In finance, it is important to check, double-check and check again to ensure the numbers are accurate. You do not want to start a business and then realize your financial model had an error. Plus input from other perspectives will help ensure you have accounted for most everything.
As always, it is beneficial to have trusted partners to assist you. Headway, LLC is here as an extension of your team to provide valuable insight based on our years of experience. Why incur the cost of staffing an entire finance department when you can pay a flat fee for experts to monitor and maintain your finances? Contact us today for your free evaluation.