The role of budgeting in improving small business cash flow

Wed | March 2023

As a small business owner (or an aspiring one), you've likely heard the alarming statistic that 20 percent of small businesses fail within the first year, and 45% don't make it past five years. That's a sobering reality – especially when you pour your heart, soul, and finances into a business.

But there is hope: budgeting can help improve small business cash flow, helping you to stay afloat for longer and increase the chances of success in the long term. In the following sections, we'll answer some critical questions about:

Budgeting basics: what's a small business budget?
Why is a budget important for a business?
How does budgeting improve small business cash flow?
What are the best practices for budgeting as a small business owner?

If you're determined to make it through the first five years with more than just your hopes and dreams, keep reading as we dive into the basics of budgeting and how it can help your small business survive those crucial early years.

Small business budgeting 101

Growing up, we learn the basic economics of life: that it costs money to buy things and that we have a finite amount at our disposal. But when you're running your business, the stakes are higher; you're responsible for managing income and expenses and ensuring enough cash flow to keep your business operations afloat.

This is where budgeting comes in. A small business budget is an itemized list of all the money coming in and out of your business, broken down into categories such as materials, labor, marketing expenses, etc. It helps you plan so that you can anticipate how much cash will be available each month or quarter (or whatever period works best for you).

Why is budgeting important for a business?

Data from Statista shows that about 17 percent of small businesses are in debt upwards of $100,000. This is an almost insignificant blip in the corporate world, but that debt can be crippling for a small business.

Budgeting is essential to ensure you don't end up in this situation. It's like having an extra pair of eyes on your finances: budgeting helps you track what money is coming in and out, so you can anticipate when cash flow might be low and adjust accordingly.

Having a solid budget in place is crucial because of the following reasons:

As your business begins to scale up, you'll have less time, energy, and resources to manage it – so having a budget helps you stay on top of your finances without consuming your time.
Making decisions is easier when you know what money is coming in and out each month. This can help you determine where best to allocate resources and whether or not now is the right time for growth.
Budgeting helps keep expenses in check, preventing overspending that could lead to debt or other financial issues down the line.
Aside from avoiding debt, it helps to connect your significant investments (new software, etc.) with returns so you can understand how they impact your bottom line.

It's almost unthinkable to run a business without a budget–but how does it improve small business cash flow?

How does budgeting improve small business cash flow?

Cash flow is one of the most critical components of running any business; it allows you to pay your bills and employees on time and make investments to help your company grow. Without proper management, cash can quickly disappear – and if you're not careful, this could spell disaster for your fledgling enterprise.

A well-crafted budget helps you manage expenses better, so there's enough monthly money to cover costs. You can manage your business budget by estimating how much money will come in and out, setting limits for expenses, and tracking spending to ensure you stay within your budget.

It also helps you plan for unpredictable expenses (such as taxes or repair work) so that there are no surprises when they come up. With a budget, it's easier to identify where you can make cuts if cash flow is tight (for example, reducing marketing expenses or cutting down on staff hours).

An accurate understanding of your cash flow allows you to make investments confidently – whether in new technology, a larger office space, or hiring additional personnel. Budgeting helps you plan for the future and make decisions based on facts rather than assumptions.

Best practices for budgeting as a small business owner

Budgeting isn't just about crunching numbers. It's about ensuring your finances run smoothly so your business can thrive long-term. So, how can new small business owners get started with budgeting? You can do this by following these best practices:

Assess your current financial position. To create the best business budget, you must thoroughly; this involves gaining a complete and intricate understanding of the income generated by your business, distinguishing between fixed and variable expenses, and considering any outstanding debts or liabilities that require consideration.
Use the right software. Many budgeting software programs are available, from simple spreadsheets to complex cloud-based systems. Trust us – you'll thank yourself for taking the time to learn one of these tools. They take much guesswork and manual labor out of budgeting and help you quickly see your financial position.
Set realistic goals. When creating a budget, it's important to set achievable goals. If you need to meet your goals, something needs to change by reducing expenses or increasing revenues. The best way to do this is by tracking performance regularly and taking corrective action as required.
Be flexible with your budget. Budgeting isn't a one-time task; it should be an ongoing process that evolves with your business needs and resources. Budgets must remain fluid and adaptable, as you can only predict some expenses and income for the entire year.
Keep track of your progress. Successful budgeting requires ongoing monitoring to ensure that you're staying on track. That means regularly checking in with your budget to make sure it's still accurate and making necessary adjustments when needed. Suppose a particular expense or revenue stream isn't performing as expected. If that is the case, you may need to re-evaluate how you allocate funds in other areas to maintain a positive cash flow.

Budgeting for a small business can be daunting, but it's essential if you want to ensure the financial success of your enterprise. By following these tips, you can create and maintain an accurate budget to help improve cash flow and allow your business to grow.

Wrap Up

A small business budget is crucial to ensuring the success of your business – but regardless, sometimes things don't go to plan, and opportunities arise that you don't have the cash flow to invest in. And that's to be expected.

All small businesses experience this, but there are other options than passing up these opportunities. With swift working capital, you can invest in these opportunities and ride the momentum of these growth opportunities. At One Park Financial, we make obtaining a speedy, effortless working capital loan a reality.

Qualification takes two minutes, and funds can be in your hands within 72 hours. If you have a growing business at least three months old and $7,500 or more in monthly sales, we can help you acquire the working capital you need. Our commitment to your growth extends beyond quick funding; we collaborate with you to ensure success. Your triumph is our triumph, and we're equipped to furnish you with everything you need to flourish.

You can start the process now and get pre-qualified in 2 minutes. Once you answer a handful of questions, your business funding managers will start your process.

FAQs

Welcome to our FAQ section on budgeting for small businesses. In this section, we'll answer some of the most commonly asked questions about budgeting for small businesses.

What are the four benefits of budgeting?

Improved cash flow management: Budgeting helps you better understand your financial situation, allowing you to make informed decisions on managing and allocating resources.
Increased control over expenses: By creating a budget, you can identify areas where spending can be reduced or eliminated to boost profits.
Enhanced planning capabilities: A budget allows you to plan for future costs and investments so that there are no surprises down the road.
Greater confidence in decision-making: By accurately understanding your business's financial position, making sound decisions that align with your goals is more accessible.

What are the three primary purposes of budgeting?

To monitor and control expenses: A budget helps you keep track of your spending to ensure it's in line with your goals.
To forecast future financial needs: Budgeting allows you to plan for future costs, investments, or unexpected expenses so that there are no surprises down the road.
To identify areas of improvement: By tracking performance regularly, a budget can help identify areas where money is being wasted or could be better allocated to improve profits.

What is budgeting, and why is it important?

Budgeting is essential to managing a business's finances, as it helps you better understand your financial situation and plan for future costs and investments.

A budget allows you to control expenses, forecast future needs and identify areas where money is wasted or could be allocated more efficiently to improve profits. In short, budgeting is essential for any small business owner who wants to ensure the success of their enterprise.

Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.