When you are running a business, you have to be careful not to spend more money than your business is generating. Although this is common sense, it’s not always practiced. Entrepreneurs are often tempted to take a few small financial risks with their money in the hope that they will then be in a position to bring in more money.
In truth, it’s much better in the long run to avoid the thrill of this risk-taking behavior and build your business slowly, even conservatively, by maintaining a balanced budget. Yes, it’s possible that a few more well-placed ads will generate a tidal wave of traffic that will then turn into sales, but it’s equally possible that your ads will fizzle or that your offer won’t convert as well as you had forecast.
If you do spend money faster than you should, when cash outflow exceeds cash inflow, then you can run into multiple issues, like postponing bill payment, not paying employees on time, and disrupting business operations.
Here, then, are 4 tips on how to keep your budget balanced:
1. Maintain a Positive Cashflow Balance.
It’s possible that your company is earning more money than it is spending, but timing can disrupt your budget. For instance, if in a given month clients owe you $10,000 and your business expenses average around $4,000, then, on paper, you have a positive balance of $6,000. However, if the clients have a 30-day credit and you receive the $10,000 at the end of the month but your $4,000 in costs come in the first two weeks of the month, then your business will struggle.
2. Outsource your accounting.
If your business is a small one and you’re good at financial management, it might make sense to do all your own bookkeeping and accounting. In addition, many excellent money management apps can help you do the work quickly and well. However, if you’re running your business, you may not have enough time to keep a careful eye on your finances. As a result, you only do them when you can find the time, doing them somewhat erratically so that you end up falling behind and then catching up. Although keeping your books is important, it’s not urgent, and the urgent issues in your day-to-day business life will take up most of your attention. This inconsistency is a huge risk, and if you can’t afford to hire an employee to do the work, then you should consider outsourcing your finances to an accounting firm.
3: Stabilize Your Income Sources
In every business, income sources tend to fluctuate. Customer numbers go up or down depending on the success of your marketing and sales efforts. If you have clients, these also tend to come and go. Since income determines how much you can afford to spend while still staying on budget, it’s important that you have some way of stabilizing your income sources. One way to do this is to invest in assets outside your business that will provide a steady return. This will keep your total income partly independent of your business fortunes.
4. Distinguish between different types of costs.
When working to develop a balanced budget, you will have to distinguish between three different categories of income: fixed costs, variable costs, and one-time costs. By making this distinction, you will have a much more predictable budget. You’ll also know how to spend mindfully. When things are a little lean and your income has dropped, you’ll know which expenses to cut without harming your business.
- A fixed cost is a recurring cost that occurs every month. This includes basics like rent, utilities, B2B services, and transportation.
- A variable cost fluctuates every month. This includes temporary labor costs, sales commissions, and delivery and shipping charges.
- One time spends. These are things that you only need to buy once. This includes repairs, new equipment, and business seminars.
Let’s put it all together. By eliminating negative cash flow issues, by stabilizing your income through outside investments, and by understanding your costs, you will be able, with a little trial and error, to develop a workable budget for your company that will ensure its longevity.