According to various surveys, it is found that 80% of businesses shut down within five years of opening. Now, there are various reasons why this happens, but insufficient cash flow still tops the list. It does not matter what industry you are in; be it a salon, motorbike showroom, or an independent restaurant, you need to follow the laws of economics.
One of the most common reasons businesses shut down is the lack of proper budgeting. Even if they have one, they fail to maintain it. While people may find budgeting a tedious task, it is what saves your business from drowning. If you need help with budgeting or other financial matters in your business, contact a Southwest Florida accountant today.
Budgeting tips for small businesses
- Calculate your income sources.
The very first step of budgeting is determining your income sources. This means calculating your income and finding out where it is coming from. If you think you can keep up with the various revenue sources in your mind, you might be wrong. It is easy to get confused and lose track. Before you know it, you will be spending more than you earn.
- Determine fixed costs.
Fixed costs are expenses that are not going to change despite your income amount. Therefore, once you have calculated your income and sources, it is time to determine what and how much your fixed costs are. These stay the same every month, such as rent, food, website hosting, internet, phone plans, etc. Once the list is made, add them up to see how much your permanent expenses are for a month.
- Know your gross profit margin.
Gross profit margin is the amount you are left with after dealing with your expenses. It shows you the actual state of your business and whether it is doing good or bad. You may be able to understand this better with an example.
Suppose your business made an annual revenue of $20,000,000 but paid debts that are more than your revenue amount. Now, you are left with nothing at the end of the year, which is obviously not a good sign. You can now focus on those expenses that are not benefiting your business and exclude them.
- Establish an emergency reserve fund.
It is recommended for all families to keep some amount in their emergency funds for unforeseen circumstances. Having an emergency fund will prevent you from using your credit card or opening your retirement savings. The same goes for businesses in Southwest Florida.
You never know what might happen, and you should be prepared for anything the market throws at you. It might be a trade dispute or a construction project happening outside your establishment. It is critical to have one, no matter whether your business is small or big.
