Creating and maintaining a budget is an essential skill every entrepreneur must learn. The budget is an integral part of business management and a way to manage finances. With a good budget, your business runs smoothly, cash flow is managed, bills and salaries are paid, and operational costs are handled efficiently. Use these tips to take control of your finances and improve your budgeting skills.
Keep Business and Personal Finances Separate.
Mixing business and personal finances is a common mistake among entrepreneurs. Funneling money and credit to your business from your personal account and vice versa is often tempting, particularly at times when you want to maintain a good cash flow. However, this will have negative consequences to your finances, both business and personal. By keeping them separate, you can prepare a straightforward budget and a clearer, more accurate estimate of your sales, losses and profits.
Learn to Prioritize Expenses.
Running a business can be exciting and your enthusiasm can make it easy to lose touch with your budget. Avoid overspending by carefully assessing what you are about to spend for and how that expense will help/impact your business later. Only if an expense can help improve your processes, bring in more assets or increase your profits should you consider it.
Keep a Record.
Create a system for keeping your documents for easy reference later. Business receipts in particular should be recorded and stored regardless of the amount. If necessary, make photocopies of important papers and keep them in a separate file. These, along with invoices and receipts will give you a better understanding about how your business is doing and help you create an effective working budget.
Prepare for Taxes.
Do not underestimate how taxes can affect your budget, so set aside money (preferably cash) in your budget to pay for taxes. It is a good idea to plan ahead and set aside cash from your revenue for this purpose. Having enough put aside for taxes will save you the unpleasant surprise that come with tax expenses you are unprepared for, the expense of late fees and the inconvenience of an audit.
Keep a Cash Reserve.
As an entrepreneur, you can expect your income to fluctuate. You may earn more on some days or you may even run your business at a loss initially. To prepare for surprises, always put aside at least 5% of your income to pay for any unforeseen expenses that might occur.
Note Your Expendables.
As with all business-related expenses, there are some things that you can do without in case business is not doing so well or if you need to spend for something important. Know which expenses these are so you can remove them from the expense budget without hurting your business operations.
Consider Allowances in Your Budget.
When you prepare a budget, set up a reasonable allowance for unexpected expenses. This will help ensure that you put aside more money than what you might need. In case of changes such as price increases, miscalculations or an expensive but necessary purchase, you will have enough to cover for the expense.
Review Your Budget.
Perform a monthly review of your budget to determine where you are at the moment. Over time, you will be able to see a pattern of spending and identify areas of improvement. Comparing the budget forecast with the actual expenses can help you determine which steps to take to increase your profit and improve your operations. Over time, you may have to work with a professional bookkeeper for this but having the capability to review and understand your budget will help you create better, more effective strategies for the success of your business.