Why the Small Business Owner Needs a Budget

Why the Small Business Owner Needs a Budget

By fabman

I know I tend to harp on the subjects of budgeting, debt management and cash flow optimization a lot, but I have a good reason. I believe that these three items are extremely important not only for the beginning wealth-builder, but also as important for the future small business owner in you.

Budgeting My father ran a successful business for over 20 years and he never had a long-term budget. He just managed his business from month to month. If he had sales coming in, life was great. He had more than enough to make the payroll and pay for the month's expenses. If sales were poor for the month, things were a little more difficult. He had to scrape by and thing were well, not so great.

Many small business owners don't have a budget because they're more concerned with growing sales and getting the work done. The back office and accounting stuff is a lower priority than "bringing in the money."

When you have a budget, you can better anticipate what your expenses will be several months down the line. In the process, you create a plan that acts as an early warning indicator. You can start to see if you're going to run into trouble down the line.

My budget isn't the standard worksheet that tracks only what my expenses will be for the months ahead. I have columns for anticipated income and other sources of revenue in addition to anticipated expenses. I list out the costs of gifts for weddings, birthday parties and other things like vacations, insurance payments and holiday gifts. This forces me to manage my income a little better than most of my friends. Since I know there could be a shortfall one-month (ie, more expenses than income), I know when I can and when I can't spend my money on non-budgeted items. "Money is going to be tight this month" is a phrase I don't like saying, but it keeps me out of debt which brings me to my next point.

Debt Management When you don't plan and budget for future expenses, you're forced to rely on short-term sources of cash. For the

Business owners do the same, especially those just starting out. You didn't anticipate the high cost of your new menus or the repair to the leak in the restroom or the equipment that you bought dying on you just after you opened Shop.

The best advice I ever received was not to borrow to buy things that immediately depreciated in value. In other words, buy true assets, not liabilities. If you buy things that will require more and more cash to maintain each month, but don't give you any cash in return, you'll run into trouble. Talk to any small business owner and they know this firsthand. In big corporations they closely monitor something-called return on capital. In laymen's terms it means how much money that piece of equipment (asset) is throwing off each year. If you invest in assets that appreciate in value and throw off a positive cash flow (most notably real estate), you'll be out of the rat race before you know it.

Cash Flow Management A lot of people talk about budgeting and even more people talk about getting out of debt, but I rarely come across anyone talking about the importance of cash flow management. Your net cash flow each month is simply your total income minus your monthly expenses. Your aim is to increase your net cash flow over the course of your life. Obviously the equation is pretty simple:

Cash Flow = Income - Expenses

Guess which part most people focus on? Right, income. Everyone wants to earn more money, but they never learn how to cut their expenses and get both variables working in their favor (increasing income and decreasing expenses). My suggestion is that you begin looking at ways to cut some expenses immediately. Maybe it's cutting back on the number of meals you eat out or cutting back on the trips to the malls or the local coffeehouse. Whatever it is, analyze that budget of yours and cut away. In my opinion cutting expenses is a lot easier than increasing your income over the short-term.

Cash flow management is so important because if you have a positive cash flow every month, you won't run into situations where you have to take on debt to support your operations. If you don't have to take on excessive debt, you don't have to pay interest. If you don't have to pay too much in interest, you have more to invest. It's a chain reaction: take care of your cash flow and it will take care of you in the future.

Extra Credit: Passive Income If you want extra credit and want to truly build wealth you'll secure income streams that come to you passively (ie, you don't have to physically work for the checks to come in your mailbox). Passive income streams include royalties, fees from your franchise and real estate. Of course there is a little work upfront and you can't just buy a real estate property as an investment and sit by the mailbox waiting for checks. You have to learn to manage the place, deal with tenants, and a dozen other routine tasks. It's a little work, but the payoff is unparalleled. The payoff when your passive income exceeds your expenses is a nirvana called financial freedom.

In Summary If you want to be a business owner you'll need a lot of the same skills that are needed to manage you personal finances. Learn how to do each of these three things well (budget, manage debt and mind your cash flow) and you'll be better equipped to run that business you've been thinking of opening.

All the best.

fabman

fabman is the editor of fabman secrets newsletter an Ezine dedicated to helping teach people how to invest, plan for the future and retire early. His ultimate goal is to teach people how to become Financially FREE. Subscribe to his newsletter for more tips, tricks and secrets of successful money management and wealth-building! mailto:joinus@fabmansecrets.com

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