Small business owners are great at solving problems with their products or services, but they’re not always great at avoiding financial fires in their businesses.
Entrepreneurs are driven and motivated. They spot a problem and then they even developed a product or service to solve it. However, despite their intelligence and drive, many small business owners skip a few important and necessary steps prior to launch. These steps are crucial for planning and risk reduction. Two of these steps are writing a business plan and developing a business budget (financial forecast). Both are very important, but here we are focusing on financial forecasting (budgeting) as a way to reduce the number of money crises that may crop up over the next month, quarter or fiscal year.
Many businesses fail due to cash flow challenges. In a lot of instances, these businesses may have been saved if the owner used their financial forecasting tools. Imagine a business owner running around with a hose trying to extinguish unexpected flames in his business. This owner will likely fail unless he develops a business budget and takes appropriate action. Now, imagine a different business owner working on her business because she has a business budget and she does not have to run around putting out financial flare-ups. This business owner can foresee potential cash flow problems and take necessary action to avoid a crisis. I already know which of these two entrepreneurs most people want to be, so we are going to talk about how to make a business budget so you can leave the hose in the garden and avoid financial conflagrations.
Put down the hose and develop a business budget!
Financial flare ups, such as an unexpected large order coming in, something as simple as the (forgotten) quarterly insurance premium being due or the food truck’s generator being stolen, can actually devastate a business financially. While you can’t plan for every scenario, you can make some educated assumptions about your market and industry and use those assumptions to make realistic financial forecasts for your business. Here are the steps to developing a business budget:
- If you are in business, get out your historical financials (cash flow, profit & loss for example) so you have them for reference. If not in business yet, start with step 2.
- Get a copy of Excel financial worksheets from a business coach at Business Impact NW.
- Go to your local library and meet with a reference librarian. Talk to him or her about your business, your target customer and your industry. The librarian can show you, various tools and databases available for free (all you need is a free library card) to do your market research.
- Conduct market research –
- How many products or services can you realistically provide in a month (Sales Forecast)?
- What price are customers willing to pay for the product/service?
- Research your costs –
- (If applicable) What are your start-up expenses (not working capital)? This is where you will account for one-time expenses such as signage, build-out and so forth.
- What are your costs to provide the service or product (Cost of Goods Sold)?
- What other fixed and variable costs will there be to run this business?
- Did you account for things like toilet paper, office cleaning supplies, breakage (if you are running a restaurant) and other things not listed elsewhere in your forecast?
- Did you factor in routine maintenance costs for any business vehicles and/or machinery?
- Other things depending on your business/industry can also come into play and need your research – as part of your budget preparation, connect with a business coach from our Veterans Business Outreach Center or Washington Women’s Business Center so they can help you refine and focus your research questions.
- To quote Julie Chen Moonves on the TV show Big Brother “expect the unexpected.”
- What if there is a fire or flood that caused your business to close for a month or more. Do you have at least one month of fixed expenses covered?
- If your food truck won’t start and you find out the engine is kaput, do you have the funds to replace the engine or the truck?
- If the unexpected happens, (and this can be a good thing like an unexpected large order for your products) are your business plan and financial projections in order so you can apply for a loan or line of credit to carry you through?
Business budgeting seems very daunting and it surely is not the most fun thing to do on a weekend. However budgeting is so crucial to knowing what is going on with your business. What if your parts supplier starts raising their price? When you have a budget in this instance, you can easily identify how this increase will impact your business bottom line and make informed decisions as to any actions you may need to take. The good news is that business budgeting is not very daunting when you work with a business coach. Coaches from both the Veterans Business Outreach Center and the Women’s Business Center are here to help – and the good news is – you don’t have to be a woman or a veteran to get coaching from us.
About the author
Steve Watts-Oelrich, JD
Steve entered the Air Force right out of high school. During his time on active duty, he obtained his B.S. Degree in Workforce Education, Training and Development. After serving eight years, Steve honorably separated from the military and began law school a short time later. While in law school, he did a legislative externship to assist homeless parents in Washington State and he was elected Student Bar Association Treasurer. Steve got his J.D. from Seattle University School of Law in 1999. Upon passing the bar, Steve went into partnership with a law school classmate and then ultimately went solo. After closing the firm, Steve went to work as a counselor for incarcerated youth. He subsequently worked for some tech companies in a role of recruitment and training.