Small and mid-sized businesses are the economy’s lifeblood, yet they continue to fail at an alarming rate. And some lost opportunities could seemingly have been avoided with better planning – most notably, a budget.
According to CBInsights, more than 1/3 of new businesses shutter due to:
Had many of these business owners crafted realistic and effective financial plans, they might not have been forced to close their doors. After all, without a solid budget, how can you accurately track what’s coming in and what’s going out, let alone plan for expansion?
It’s important to have a snapshot of your balance sheet before you attempt to allocate your funds. Here’s how to properly assess your business financials:
First, understand your revenue streams. Otherwise, you’re potentially setting yourself up for failure by overshooting. This could leave you in a pinch and forced to borrow funds at undesirable rates just to stay above water.
Assuming you’ve been in business for at least a couple of years, access last year’s revenue performance to gauge realistic results for the current period.
This will give you a sense of your monthly sales before any expenses. You can also identify any seasonal trends, so you’re prepared for your busy season and historically slower months. From there, you can make the calculation for your annual revenue.
It’s also important to identify both fixed and variable costs.
Your cost base will help you identify how much money you have left to spend and will serve as the foundation of your business budget. Undershooting your costs could cost you. It’s crucial that you have a solid handle on your expenses, because this will set the stage for you to grow your business through sales and future profits. Experts advise erring on the side of caution. It’s easier to adjust when you overstate your expenses vs. when you underestimate them.
You’ll want to familiarize yourself with your company’s profit margins, which reflect profits as a percentage of sales.
Your gross profit margin is the cash in the bank once expenses have been satisfied at year-end. It’s also a reflection of the health of your business’s balance sheet. This will let you know if expenses are outpacing your sales. And if they are, you’ll want to make some adjustments to reverse that dynamic.
By assessing revenue streams, identifying fixed and variable costs, and familiarizing yourself with profit margins, you can gain a clear picture of your business's financial health and make informed decisions that will set you up for long-term success. Remember: it's better to err on the side of caution and overstate your expenses rather than underestimate them.
With a solid budget in place, you can track what's coming in and going out, plan for expansion, and avoid the pitfalls that have befallen so many other small businesses.
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