Budgeting Best Practices for Small Businesses 101

Effective budgeting is the cornerstone of financial health for any business, regardless of its size. For small businesses, in particular, a well-crafted budget helps you plan for the future, manage cash flow, and make informed decisions. In our experience, however, many of our small business clients find the process daunting or don’t know where to start. That’s why we’re offering the following overview on budgeting best practices for small businesses. 

Finetune your financial goals.  

Before diving into the numbers, clearly define your financial goals. Focus on questions like:

• What are my short-term and long-term objectives?

• Am I looking to expand, hire more staff, or invest in new technology?

• What are my revenue targets for the next year?

When you understand your goals, you will be in a stronger position to manage your budget and ensure your financial resources are allocated effectively.

Be an expert when it comes to your expenses.  

If you don’t know where your money is going (and you’d be surprised how many business owners don’t), you’ll struggle to keep your budget in line. It’s a good habit to categorize your expenses into fixed (rent, salaries) versus variable (utilities, supplies) costs. Knowing where your money goes is just one part of the puzzle. We urge our clients to regularly review their expenses in pursuit of patterns, which can enable them to easily cut unnecessary costs, and direct funds with greater precision. 

Channel your inner fortune teller!  

While it’s true that predicting revenue can be challenging, especially for new businesses, if possible use any historical data you have to forecast future revenue. If you’re just starting out, research industry benchmarks and consider seasonal trends. Embrace a conservative approach to your estimates and you’ll avoid overestimating your income and running into cash flow problems. Speaking of cash flow… 

Clarify your numbers with a cash flow statement.

Many small business owners aren’t familiar with a cash flow statement. If you’re one of them, here’s what you need to know. A cash flow statement provides a detailed look at the inflows and outflows of cash in your business. With it, you will have a better understanding of when cash will be available, which naturally empowers you to meet your financial obligations. Update your cash flow statement regularly to keep an accurate picture of your financial health, otherwise, it won’t be as useful to you.

Create a contingency fund.

As a team, we avoid taking a gloomy outlook, but we do believe in expecting the best while planning for the worst. What do we mean by this? You’ve likely already experienced the very real small business scenario in which unexpected expenses arise at any time. This doesn’t need to impede your progress or growth. Safeguard against these potential setbacks by setting aside a contingency fund—typically 5-10% of your budget. Consider this your financial cushion upon which you can rest your peace of mind and the stability of your business.

Analyze and adjust, accordingly.  

Budgets evolve — just like your business! Get in the habit of reviewing your budget on a routine basis in order to compare actual performance against your projections. And then, adjust accordingly! Always check that your numbers are aligned with your goals and sensitive to market conditions, over which you have no control.  

Trust in technology.  

Utilize budgeting and accounting software to streamline your budgeting process, which not only saves time but can also reduce the risk of errors, allowing you to focus on strategic decision-making.

Teamwork makes the dream work.

Budgeting benefits from the buddy system, it really does. Involving key team members in the budgeting process fosters a sense of ownership and accountability. Spoiler alert: employees who understand the financial goals and constraints of the business are more likely to make cost-effective decisions. Encourage open communication and feedback to ensure all perspectives are considered.

Keep a keen eye on your industry.

Just as we advise our clients to pay attention to market shifts, so too should you stay informed about trends and changes in your industry. Economic shifts, new regulations, and market developments can impact your budget overnight, especially if you’re not prepared. Regularly reviewing industry news and reports helps you anticipate changes and keep in control of your budget, even despite those factors that fall outside of your control. 

Partner with the pros at Cove! 

Budgeting as a small business is overwhelming and our team is standing by to help. We love what we do as you love what you do. 

“Cove offers services that make our little company feel like a fortune 500 company. They know our account and are able to proactively guide us about current rules, regulations and taxes. Cove manages our Human Resources through bookkeeping and has been a huge asset for our company, enabling us to grow every year for eight years now.” — Cleary Bikes

Allow us to be a part of your success by leaving the small business budgeting and bookkeeping services to our team of experts. 

Get to know Cove. Contact us today!