Did you know that the US Census Bureau defines a small business as any business with fewer than 500 employees? The most recent census data showed there were 7,977,623 small businesses operating in the US.
Small businesses and entrepreneurship have always been the backbone of market economies and safety nets for unemployment. It’s in everyone’s best interest if as many SMEs can survive and thrive as possible. One major key to survival is great financial management.
If you want to find out how to boost your financial management skills for the upcoming year, check out these five budgeting tips for small businesses.
1. Watch Your Operations Cycle(s) Like a Hawk
Having a deep understanding of your operations and cash conversion cycles can really improve the success of your budgeting. The operations cycle is typically defined as the period of time from when you first receive your inventory until you receive the cash payment from sales or services rendered. The cash conversion cycle is the period of time from when you pay for stock until you receive cash.
Some businesses will have stable cycles throughout the year, while others will have peaks of activity (where the cycles are much shorter) and ‘dry spells’. If you’re running a small business, you can use analysis software or even manually peruse your records to see if you have consistent or fluctuating activity. This will allow you to predict low cashflow periods and budget accordingly.
Operations cycle data has applications beyond budget as well. You can schedule employee training, do renovations and upgrades, and make other similar investments during quieter weeks or months. These investments can bring in more customers and revenue, which will allow you to eventually expand your budget.
2. Have Defensive Cash Reserves
The idea of needing defensive cash reserves was relegated to academic scenarios in business management school until the economy ground to a halt in 2020. The old way of thinking was that any cash sitting for a rainy day was being ‘used inefficiently’, but we all learned that defensive reserves can be a lifeline in times of trouble. They can be used for unexpected drops in activity, freak closures, accidents, legal fees, or any other unfortunate event.
There are many different places to invest your defensive cash equivalents, but you’ll want to keep risk low while also making sure the investments grow with inflation. Gold and precious metals are the best because they rarely lose value and have historically kept up with or outpaced inflation. Putting the money into government bonds and using the laddering strategy is another great way to keep that money’s value growing a little bit faster than inflation.
3. Outsource Critical but Non-Core Functions
The best overall use of your and your staff’s time is on your specialty. That is why outsourcing non-core functions often prove cheaper for businesses than hiring extra staff to perform that function.
For example, a baker starts a small baking business out of her own kitchen. She’s a brilliant baker and her goods are therefore a huge hit, her business is successful and soon she needs to hire more employees to keep up.
If she spends the bulk of her working hours interviewing, hiring, and managing employees, her business loses out on her skill and expertise. It would be more sensible for her to outsource to a recruiting and/or HR service so that she can spend the majority of her time working on the baking. The time she can now devote to baking will continue to make her money and she also saves money by outsourcing to an HR service rather than hiring an extra manager.
This same principle applies to any critical function that distracts from your main task. The main culprits are HR, legal concerns, tax concerns, bookkeeping, accounting, and cleaning.
4. Minimize Unproductivity
Another key to successful budgeting is understanding that everything has an ROI. If you spend money on a sales campaign, the only way it has a positive ROI is if the profit from the increased sales exceeds the cost of the marketing. If you or an employee spend time on something, the only way that time has a positive return is if the activity saved or made more money than it cost.
To get the most out of your and your employees’ salaries, try to eliminate time-wasting activities. One way to do this is to avoid unnecessary stock takes and other distracting busywork.
You can also give your employees slightly larger time windows so that they can focus. If you know a project can be done in seven days, give your team nine or ten days.
Your team will ironically work faster because they won’t feel frantically pressured. There will be fewer mistakes to go back and correct, which also means you’ll save money and get a reputation for consistently delivering early.
5. Be Proactive About Your Financing
If loans, financing, and lines of credit are part of your cash flow strategy, apply as early as possible. Don’t wait for your finances to start tanking before you reach out for a loan.
It’s best to do this when you don’t need a loan at all. In such cases, you can opt for a business credit card or overdraft rather than having to take out a massive ‘business saving’ type of loan. Applying proactively may also let you lock in a very low interest rate and avoid subjecting yourself to one that changes with the economy.
Apply These Budgeting Tips and Other Great Practices Today
All of these budgeting tips require a hands-on approach to financial management. Paying close attention to your operations cycles, cash reserves, productivity, and other metrics is essential to long-term success. You’ll be able to stop small problems from turning into big ones.
Being proactive with debt and outsourcing will also save you a lot of money. You’ll have more money to service debt and ironically less crippling debt to service.
Managing a small business doesn’t have to be overwhelming. A good partner in financial management will be able to help you with budgeting and so much more. Contact us today if you’re looking for competent and helpful financial managers.