12 budgeting tips for the new year
As 2019 approaches, one of the most common resolutions people commit to is becoming more financially stable. This is true for consumers and business owners alike. For small business owners looking to become stronger financially next year, it will be critical to think about your budget now and plan ahead.
Better Business Bureau Northwest + Pacific is focused on providing business development information such as this to help owners and employees improve their bottom line. Here’s what we recommend:
• Pay attention to every dime: As a small business owner, it’s common to push bookkeeping until the end of every month, or maybe even the end of every quarter. But to really understand your financials, it is important to track every dollar spent.
• Plan for sales volatility: After your first year, you should have an understanding where your best months are going to be so you can prepare cash to cover expenses during the down months.
• Overestimate expenses: Most expenses vary — utilities, overtime pay and supplies, for example. If you overestimate what these costs will be, you’ll protect yourself from running dry when expenses are high. If you do end up with extra cash, consider reinvesting it.
• Share your budget with employees: Too many business owners keep the company’s financial statements a secret from internal staff, when, really, being transparent with employees can help them understand the business, the bottom line and what they can do to help drive the organization toward success.
• Put money away for taxes and emergencies: Remember, with profits come taxes. A good business practice is to set aside at least 30 percent of your profits to take care of tax-related expenses or unforeseen emergencies.
• Anticipate future expenses: It’s hard to plan for everything, but try to consider what’s coming down the pike every year. Things like training and recruiting expenses, marketing and advertising increases, or maybe you’re planning on switching to cloud storage in 2019. Make sure you understand the investment and have the funds on hand.
Now, let’s address one more important item when we’re talking about a businesses’ financial health: working capital. Working capital is defined by this formula: current assets – current liabilities = working capital. This metric tells investors important information about your operational efficiency and whether the short-term financial outlook is positive. Know this number.
Take this a step further with this formula: current assets / current liabilities = current ratio. When you divide assets by liabilities, this tells investors whether the business has short-term assets to pay off short-term debt. Another critical metric. Ideally, that current ratio should fall between 1.2 and 2. When your current assets are less than current liabilities, you might have a hard time getting capital loans because this indicates you could have an issue paying creditors.
There are other formulae and algorithms to help investors understand the risk they’re taking on when they look at your business, but it all comes down to one important concept: keeping your working capital at a healthy level to predict short-term assets and liabilities, especially available cash. This is especially true for small business owners who might be looking to start a project or venture in 2019, as this often requires you to dip into your working capital.
Here are BBB’s tips on how to improve working capital:
• Incentivize receivables: Simply put, this means rewarding customers who pay early or on time and severing ties with customers who default on payments.
• Pay your debt obligations on time: Instruct your accounts payable department and/or accounting team to pay debt on time so you avoid additional penalties.
• Research vendors: You want to negotiate with vendors for discounts and maintain solid relationships with them so that if you ever need leniency when paying, they’ll oblige.
• Optimize fixed and variable costs: Reduce these costs wherever possible to try and eliminate wasteful spending. A reduction in expenses has an immediate positive impact on liquidity.
• Examine interest payments: Review these terms regularly because, often, the interest on loans and other fixed debt may be eligible for modification. If so, you can pay off the debt faster and save on interest expenses, which, again, reduces your liability.
• Manage inventory: Don’t overstock your inventory and do be ruthless about cutting products and services that aren’t selling to keep your sales healthy.
Jeremy Johnson is the Eastern Idaho Marketplace Manager for the Better Business Bureau Northwest + Pacific.