In the wake of the pandemic, every business can do with some smart money management tips. As consumer demand and behaviour have changed significantly over the past few months, many small and medium businesses are finding it challenging to stay profitable. Hence, managing the business budget is of utmost importance. Though it might be tough to predict the future (and sales) accurately during these trying times, here are 5 tips you can follow to control your costs and keep the cash flow positive.
5 Tips to Manage Your Business Budget Effectively
Understand fixed and variable costs
When you create a budget, you account for both fixed and variable costs. Now, you need to bear fixed costs irrespective of your production level. These include rent, utilities, equipment, and insurance. Variable expenses include the cost of raw materials, hourly wages of labourers etc. Now, big businesses might be able to balance their large fixed costs by producing more. However, for small businesses, it is wise to keep fixed costs low, as the production might be small. To do that, you can carefully assess what equipment and utilities you actually need and discard the others. For example, leasing instead of buying office space, selling off fax machines when you have computers, and using free calling apps instead of telephones, are smart moves.
Also Read: 6 Financial Mistakes New Business Owners Make
Invest in an accountant and accounting software
Does investing seem strange when you are looking for budget planner ideas? Well, hiring an experienced and knowledgeable accountant can help you in the long run. He or she will constantly track your expenses, do the necessary course correction and ensure that taxes are paid on time. Also, by buying the latest accounting software, you can track expenses and cash inflow precisely and automatically. These tools can help you develop a new budget based on future projections and past data as well.
Be aware of the risks to your business
Every business and industry comes with its own set of risks. Seasonality is one of them. For instance, if you sell seasonal products like winter garments, or you are in an industry like agriculture, it is a good idea to break down your yearly budget into quarterly or monthly budgets. Apart from this factor, be aware of any change in regulations in your industry or new overtime and tax laws. This will help you to plan expenses better. Also, try to predict any challenge to your productivity and what kind of monetary impact it might have.
Also Read: Three Simple Steps to Save Money Effectively
Be detailed yet flexible
One of the most effective budget management skills is to be as detailed as possible while crafting a budget. It does not mean planning for every cheque that you will write. However, breaking down a company budget by departments, teams and even employee position types can be helpful. For example, when you are budgeting for employee benefits, you can break it down into retirement benefits, health insurance, holiday pay etc. However, be flexible too and set aside a contingency fund. Also, keep revisiting your budget to see if you are on the right track or need to make some inclusions and exclusions.
Make sure everyone is on the same page
It is not enough to create a budget and only allow the top management to monitor it. Share it with all departments and teams to increase transparency and get valuable feedback. For instance, those who actually handle the machines in your factory will be able to tell if you need a better version or fewer machines. By sharing the budget, you can also motivate your employees to control expenses and become more efficient. To take it up a notch, you can offer incentives or rewards to those who go the extra mile to keep costs low.
Also Read: 8 Financially Prudent Habits for financial stability
Some Other Budget Management Tips for Business
Apart from the above tips, try incorporating the following suggestions as well:
Automate payments
Automation assists in effective budget planning. All your important payments such as business loan EMIs, utility bill payments, and employee wages, must be automated. Since the previous expenses are of fixed nature, it's always a good idea to pay them first. Businesses sometimes forget to pay their loan dues in a rush to meet the variable expenses. The issue leads to a drop in credit score and a high business loan interest rate in future.
Pick your loan product wisely
There are various sources of business financing. There are customised loans available in the market for all of your small and large business needs. For example, if you are unsure of your requirement, a line of credit is a good option. A term loan is appropriate if you have certain anticipated expenses. Similarly, medical equipment financing is available for equipment purchases, and working capital loans are perfect for covering daily operations needs.
However, all of these funding choices have distinct business loan interest rates and terms. Therefore, before choosing one for your firm, you must carefully examine them. Remember that an inappropriate loan product has the potential to ruin your company's budget.
Be sure of your budgeting process
Business budget planning can be done in a variety of ways. Each of these strategies follows a unique approach. When selecting one, you must be picky. Here are some of the most critical budget management methods for businesses.
year's budget. The primary goal of this strategy is to see if the key cost driver varies from year to year.
Activity-based budgeting
This method aids in determining the amount of money you will need to put into input to attain the desired output. For example, you will need to increase your workforce, update outdated equipment, and so on if you want to produce 1 lakh units of goods. The actual cost of execution to get the desired outcome is what you obtain here.
Value proposition budgeting
This method is also referred to as priority-based budgeting. As a business owner, you must justify every single rupee spent on the same kind of expenses in the previous year's budget before incorporating them into the current year's budget. This method aids in determining which areas of spending produce favourable results.
Managing budgets in business is not a difficult task. You only need to be careful about your spending approach.
To conclude
Hopefully, the money management tips discussed above will help you to tide over the current situation with confidence. Reduce fixed or variable expenses wherever possible, be detailed in your approach, and invest in the right budget planner tools to reap profits in the long run.
Disclaimer: This post was first published on 1 September 2020 and has been updated for the latest information, freshness, and accuracy.
