When you own or run a business, budgeting can be a dreaded task. It can suck up hours of your week. Time you could spend on the sales floor or doing other things to increase sales. However, is has to be done. It’s a necessary evil.
Budgeting, as dull as it can be, is one of the most important things you can do to stay in business. Without a good, well thought out budget, that is updated daily or at least weekly, you run the risk of running out of cash and closing your doors for good. Sadly, it’s something that is happening all too often during these tough times. So how can you make the most of this task?
What is a Budget?
A budget is really a plan that shows what cash you bring in vs. what cash you spend, and when. It sounds too simplistic, but that is really what it is about. If you bring in more cash than you spend, you make money. If you spend more cash than you make, you lose money. But it’s also about the timing of these cash inflows and outflows. You need to have the right amount of cash in your business, so that when cash is set to leave your account, you have more than enough to cover it.
How Can I Generate Cash?
You can generate cash in a few ways. The best way is to produce it from your operations. In fact, if you don’t produce enough cash from operations to cover your cash outflows, once you are in business for a couple of years, your business is going to fail. Another way to generate cash is through borrowing from the bank or someone else. But remember, you need to pay interest on this cash and often lock yourself into covenants that keep you and your business on a tight leash. Another way to generate cash is to put more money in the business yourself or sell part of your business to other investors. For the latter, you give up control and dilute your own share of the company, so be careful. Another way to generate cash is to sell off an asset. This can be the beginning of the end though and is not sustainable.
When you sit down to plan and update your budget, start by giving budgeting the importance it deserves. Make sure you and your staff spend the time to do it right. Plan the year out by day and week. Look at last year’s results and be realistic in terms for future growth. If you’re too optimistic, you’re going to fail badly. Add pluses and minuses to arrive at forecasted daily and weekly sales. Look at last year’s expenses by day and week and roll them up. Your budget should show how much cash you’re bringing in (being paid in your account) by day or week, and the exact timing of the cash. Then take every expense and show the same—cash that is leaving your account and exactly when someone will be taking it from you. Build in a buffer for unexpected expenses too. Then sit back and take a look. Does it balance? Probably not. Hopefully it does for the year overall, but you are definitely going to need help during times when you have a lot of cash leaving and not a lot coming in, like when you buy inventory before you can sell it. This is where borrowing comes in or using other methods of generating cash to cover your obligations. Getting money from someone else doesn’t happen overnight, so plan it out months in advance.
Manage your cash flow proactively with your company stakeholders.
What Can You Do?
You can also work to manage your cash flow proactively with your company’s stakeholders. Negotiate longer payment terms with your suppliers if possible. Do the same with your other providers: insurance, rent, utilities, etc. Don’t pay anyone early, but make sure you pay invoices on time. Shop around for different lenders and service providers often. You can lower what you pay out by doing a review of the market every year or so. If you at least focus on your largest suppliers, it can really make a difference.
Steer the Ship
Once you have a good budget, you now become the captain and must steer the “ship” daily and weekly. If sales are surging, can you move up orders of hot products? If sales are below budget, then find out why. Can you run a promotion to get products out the door? Will suppliers give you a discount on what you sell that week to maintain most of your margin? Or can you cut or defer costs? Push out receivables, cancel orders, ask part-time staff to reduce their hours.
If you always find yourself in a cash crunch then something is wrong. Either you’re planning badly, your costs are too high to make a profit, or something in your operations is failing you. Find out, drill down, and right the ship! Build lots of flexibility into your business, so you can scale up and down easily to get through ups and downs. Be careful of too many fixed cost as that limits your ability to cut back in tough times.
You got this!
Bruce Winder is a retail analyst and author of newly published book RETAIL Before, During & After COVID-19 – available on Amazon. www.brucewinder.com