Starting a business is a notoriously difficult endeavour, if only for the sheer breadth of responsibilities that fall on the budding entrepreneur. It is by now well-known that business survival and longevity is no guarantee, with a little under half of new enterprises failing within the first three years of their incorporation.
There are many reasons for which a business might fail, but many individual cases point back to the juggling of multiple different tasks by a skeleton crew – to say nothing of the sheer importance of good budgeting. Indeed, it might be said that a business’ budget is one of its most important load-bearing assets. How, then, can you build a workable budget for your business in order to avoid catastrophe?
Understand Cashflow
Knowledge is key to progressing properly in growing your business, and this is particularly true for the financial side of the equation. There are many things you should be abreast of as an entrepreneur and founder, but perhaps one of the most important is cashflow – which, quite simply, describes the money coming in to your business and the money leaving it.
Cashflow does not directly relate to turnover and profit, as it takes a snapshot of the money received and the money spent. However, it is a vital metric to track for investors, as negative cashflow (spending more than you make) can indicate instability – even if you are investing that income in infrastructure or staff. As such, your budget might focus on tracking elements of your cashflow in order to moderate it for longevity.
Calculate Expenses
Part of this, then, is understanding exactly how much is leaving the business over time. Expenditure can be split into two key forms: fixed costs, and variable costs. Fixed costs are those that do not change altogether much from month to month, such as insurance payments or lease agreements for equipment. Variable costs, meanwhile, change with respect to productivity. These might include supply of raw materials, or staff costs.
Identify Areas for Improvement
With a nuanced picture of your business’ present financial situation, you can now work to underscore areas in which improvements could be made. As a younger start-up, you might not have the knowledge necessary to do this in the most efficient of ways, which is where outsourcing can become especially helpful. Using the accountancy services of a third party can ensure you get viable advice for securing profitability in the medium and long term, without unnecessarily increasing your staff-related cost burdens.
Forecasting and Long-Term Stability
This brings us to the final part of the equation: the future. A good budget is not just an ongoing template for financial sensibility; it is also a forecasting tool, that enables you to plan and predict the next months and years of your operation as a business. Between your short-term financial understandings and longer-term market analyses, you can build a workable business plan that sits within your spending remit – increasing the likelihood of a business that survives past those first five years.
