For many small businesses, it’s that time of year again – time to take stock of the past year and plan for the next with a new and improved budget.
Unless you have a crystal ball, though, there’s no way of knowing what financial surprises 2013 will bring. Even with the best of plans, it’s still important to make your budget flexible enough to handle the ups and downs in cash flow that will inevitably occur throughout the year.
As such, here are a few things to consider as you work towards your own flexible budget in the New Year.
Combine reviewing with goal planning
In order to determine where you want to go with your business in 2013, you must first take a look at where you’ve been. Write down your achievements for the past year, and then the past five years.
Once you’ve made your list, go over the items and ask yourself what business goals you would like to achieve in the year ahead. For example, maybe you want to pump up your social media and mobile efforts to reach a broader market, expand your product line or revamp your website in order to increase sales.
Once you have a clear vision of what your goals are and where you would like to take your business, start creating your budget.
Be flexible, but plan conservatively
Remember that a budget is a plan, not a commitment – and while you should expect the best, it’s always advisable to plan for the worst should things not go as expected. Unfortunately, many small business owners learn this the hard way when they run out of cash in the day-to-day running of their business.
To avoid this unpleasant scenario, your first step should be to put together a budget worksheet showing the income and expenses you expect to incur during the time period in question. Many small businesses create a monthly budget where the goal is to keep expenses below sales each month, with the leftover balance becoming the start of the next month’s budget.
By realistically committing the numbers to paper, you increase your business’s chances of success by anticipating future needs, spending, profits and cash flow. When in doubt, always be conservative.
Fixed versus variable costs
As you prepare your flexible budget, you need to separate your fixed and variable costs. Fixed costs are those costs that won’t change regardless of business activity, for example rent, utilities and insurance.
Once these are known, you’ll have to determine your unknown or variable costs such as marketing, labor and materials, using previous costs as a guideline when possible. Once you have an idea of your variable costs, you’ll then have to decide how to best allocate these items in order to maximise profits.
For example, while increasing your social media budget might bring you more Facebook followers in the coming year, would a direct-mail campaign bring more immediate sales? Only you can decide what are the best choices based on your business goals and cash projections.
Be willing to re-evaluate and revise your budget
Since there’s really no way of knowing beforehand how accurate your budget is, it’s important to compare each month’s budget with the previous one and re-evaluate the budget every month or quarter, making changes where needed.
For example, if sales in one month were much higher than expected, it’s probably reasonable to expect that expenses were higher too. Use these figures to help plan for your next budget period, taking into account seasonal and other factors. Similarly, if unit costs were 25 per cent more than you projected, the variance is probably indicating issues that need addressing, and you should adapt your budget accordingly.
Creating a flexible budget can be challenging, but by following these tips, your small business can create enough cushion to adjust to changes that may occur throughout the coming year.
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This article represents the views of the author only and not those of American Express.
Kathleen has a degree in marketing with over 10 years experience in the IT field as a database developer and web designer. As a freelance writer, Kathleen has written for several publications across Australia as well as for various business and hi-tech blogs online.