Many people dream of running a small business. It promises financial independence and allows you to do the work that you want to.
However, many people with great ideas for their business fail after mismanaging their finances. When starting your business, you should always:
1) Set Up Proper Accounting
You don’t necessarily need to hire an accountant when you’re running a small business. DIY accounting software is robust enough these days to handle the day-to-day accounting requirements.
But it is important to properly track revenue and expenses. And no matter how well organized you might be, an Excel spreadsheet isn’t going to cut it.
For example, many small businesses like to provide perks to their employees, such as a morning coffee or a free-use coffee machine and beans. These are the things that are easy to overlook. But over time, those morning coffees you don’t think twice about can add up to a significant expense – after all, Australians spend $18.7billion on coffee every year.
This is not to say you shouldn’t do a nice thing for your employees – It’s just that for the financial health of the business, you need a proper accounting set up to monitor expenses.
2) Properly Forecast Your Finances
One of the most important skills that any business owner needs to learn is how to make an accurate financial forecast. By understanding your goals, and the costs involved, you’ll be able to more accurately monitor the health of your business and identify problem areas before they really start to hurt the business.
The key part of forecasting is to set the goal. There are four different kinds of financial goals that you can set for yourself, and with each year you should reset as the business’ priorities change.
First, there’s the wildly ambitious “blue sky” goal. This is the kind where you’re seeing revenues in the millions and you’re adding new staff each week on the way to a big acquisition. This goal might not be realistic, but it should still be possible if you take some big risks and they pull off. Entrepreneurs generally start up a business focused on the blue sky goal.
The next option is to go the opposite way and figure out the “lowball” goal. This is basically the lowest possible number that you can come up with that will let you survive and keep your business open. If you’re expecting a difficult year ahead, the lowball goal is the way to go.
The third option is to be realistic. This is the goal you’d set if you assume that your business can be profitable and/or grow a little in size, but you’re not looking to hit those “fastest growing company” lists. It’s the goal if you’re looking to be responsible, but profitable.
Finally, you can aim for a “stretched” goal. This is a slightly more aggressive goal than a realistic one. In other words, you’d calculate what a healthy revenue and profitability at the end of the year would be, and then challenge yourself to exceed that by five or 10 percent. This is the goal for responsible businesses that still want to grow, add new staff, and find new opportunities.
How To Use Goals To Budget
One option is to use an accountancy firm that will help you go through the numbers and work out your business’ potential.
It’s also possible to do it yourself. Research your industry closely, and then work out how other businesses are performing. Use that data to determine what you would consider to be a success. So, for example, if the average revenue of a small retail shop is $500,000 per year in your city, then you can assume that $500,000 would be a good, realistic goal for your retail store, while $1,000,000 would be the kind of target you set yourself if you’re looking to turn your retail outlet into a chain, and fast.
Once you’ve got that goal, then you can use the information to determine what you need to do to reach it. If you’re targeting $500,000 in revenue for the year, spending $100,000 on an advertising campaign isn’t a good idea – for that much money, you’d need to be targeting far higher revenues. Similarly, if you’re targeting $500,000 in revenue, you can immediately figure out the kind of profit margins you need on each item sold, and how much stock you should be bringing buying in the first place. Don’t take out a loan for $800,000 in product if you’re only targeting $500,000 in revenues.
As you can see, goals are crucial when creating a budget. It allows you to be proactive with budgeting, rather than reactive. And the budget, in turn, can help keep you on track to achieve your business goals.
Author: Benjamin Hugh – https://www.linkedin.com/in/benjamin-hugh-1730a813b/
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