Planning Your Spending
The mere mention of the word "BUDGET" sends shivers down many spines. Small business owners might think budgeting isn't necessary, and we generally agree — at least in the traditional sense. You don't need to account for every single penny for the upcoming year. Instead, we champion a forward-thinking approach to financial planning that encompasses more than just setting revenue goals; it involves strategic spending planning.
Tools You'll Need
Before diving into your spending plan, assemble these crucial tools:
Up-to-date and precise financial records
A roadmap for potential staff changes including hires, layoffs, and raises
Business investment strategies, focusing on new equipment or software
Forecasts for expected cost increases in various areas
The Proactive Approach
Start with a deep dive into your current year's financial data, reviewing both revenue and expenditure. From here, forecast the revenue for the next year under different scenarios. Your next step is to pinpoint which costs will escalate as revenue grows — areas such as supplies, payroll, and software licenses are usual suspects. Adjust your budget in these categories to reflect the anticipated changes.
Subsequently, estimate the additional profit and decide how best to allocate this amount in the upcoming year. But, remember, certain investments like fixed assets might not appear on your Profit & Loss statement but will consume a part of your cash flow. And don't overlook the tax implications of increased profits; ensure a portion of your funds is reserved to meet tax obligations.
The Why Behind the Strategy
Wondering why this exercise is pivotal? Running a business, whether aiming for growth or maintaining the current scale, poses challenges. Revenue growth often shadows the concurrent cost increase, leading business owners into a trap of unplanned spending. The reality is far from the utopian dream of endless cash supply and unlimited growth; judicious decisions on fund allocation are essential, a factor often realized too late.
The Profit First Method
We recommend the Profit First method as a robust tool for managing your cash flow and creating a sound spending plan. This strategy directs you to continually assess your financial position, helping you set aside a designated sum for various needs, including taxes, owner’s pay, and payroll. It acts as a financial compass, guiding you in moments of cash shortages to evaluate the business dynamics and spend wisely.
Need assistance crafting a thoughtful spending plan? We are here to help! Reach out to us.
