Cash flow. It may be a term that invokes headaches for many entrepreneurs, but at the end of the day, few things will be more important to the long-term health of your business.
To take control of your cash flow, you need to create a budget. Successful budgeting will help you have a clear understanding of your income and expenses so you can make smarter decisions. A dependable budget can even help you forecast expenses and be better prepared for the inevitable downturns that strike practically every industry sooner or later. It will help you understand what needs to be done to become more efficient and profitable.
Identify All Revenue Sources And Expenses
To build a budget that serves your business well, you have to start with the basics. That means identifying all income and expenses so you can have a better idea of how much money comes in (and goes out) each month.
While identifying your revenue streams is relatively straightforward, many business owners have a harder time tracking expenses. This is because many companies have both fixed and variable expenses, meaning the amount of money the business spends can vary significantly from month to month.
Fixed costs are those that occur on a regular basis, and generally don’t change too significantly, like rent, payroll and insurance. Variable expenses are also vital for keeping your business running, but the amount can vary from month to month. Examples include utilities and marketing, as well as the need to purchase new office supplies or replace outdated equipment.
Dig deep! With so many SaaS tools available to businesses, it’s easy to forget that you’re still paying for a service you no longer use. Individuals can waste up to $1,100 per year on forgotten subscriptions — for businesses, that number will often be much higher.
For best results, try to collect data from a 12-month period. This will help you better identify seasonal variations in income and expenses (like a holiday surge or summer slump). Subtracting total expenses from your total income will give you a clear picture of what your profits looked like for each month.
Automate Your Financial Data Tracking
Identifying past performance is one thing — but managing your cash flow is an ongoing need. Because of this, you need to set up tools that will allow you track your income and expenses on an ongoing basis. While past performance is helpful, understanding your current situation is ultimately what matters most.
Fortunately, many supply chain management tools include features to track product sales, as well as how much you’ve spent on key supplies. As sales or purchases are made, financial data can often be updated automatically, reducing your staff’s workload.
However, many businesses have income or expenses that will fall outside what a single software tool can track, making for a whole lot of manual labor to pull all of your data in and standardize it. In this case, if your finance team is used to working with Excel, it can take weeks of work just to obtain an updated “big-picture” view.
Next-generation financial planning apps can help bridge this gap. For example, DataRails can be configured to draw information from all of your company’s financial data sources to provide a comprehensive overview of your budget. Because this is done automatically, you don’t have to worry about the errors that can so easily creep in when punching numbers manually. With the latest figures all in one place, it’s easy to update projections, tinker with hypothetical scenarios and reconcile past plans with what actually happened.
Plan For The Future
Once your budget has been set up, it’s time to use it to prepare for the future. In reality, that is what a successful budget is all about. By analyzing past trends with your business, you can better predict future fluctuations in profit. You can also better predict future expenses — such as when you’ll need to make another big equipment purchase.
When you take a deep dive into your past numbers, you can identify the reasons behind why some months are more profitable than others, which should have a direct impact on future decisions. From hiring seasonal workers to handle a temporary increase in demand to cutting back on marketing during your slow season, such moves can help you become even more profitable.
As part of this planning, be sure to build up a contingency fund for unexpected setbacks like a lawsuit or a pandemic. As accounting specialist Mary Girsch-Bock notes, “If your business were unable to operate for a month, how much working capital would be needed to keep it (and you) going? $5,000? $10,000? More? Whatever your answer, start saving with that goal in mind. And if you’re lucky enough to reach your savings goal quickly, by all means, don’t stop saving. Emergencies and disasters aren’t predictable, so don’t assume that your savings are enough.”
By carefully analyzing the past and continuing to collect financial data from automation tools, you can predict future financial trends with confidence. Though the exact numbers will likely vary from year to year, this advance planning ensures that you’re budgeting appropriately at all times.
Budget For A Better Business Future
By taking control of your budget today, you ensure that your business will still be here tomorrow. Though finances are hardly the most glamorous aspect of running a business, giving them the attention they deserve will help you have the financial security your company needs to thrive.
This article was originally published on Forbes.com.