Earlier this week, I shared with you the importance of using the last quarter of the year to prepare your business for big things in the new year. One of my must-do’s as the year comes to a close, is to create a new monthly budget for the next year. It’s a great exercise to see where you might run into some cash flow issues and also see what you can expect to earn from your business—hypothetically, but hopefully in reality too!
Creating an annual budget is a great time to re-evaluate all of your business spending. Do you really need to spend money on that product or service going forward? Can you find a product or service for less and still get great value? These are all things to ask yourself as you scrutinize your predictable monthly expenses. But there are a few things that you want to avoid when creating a new budget …
1. Found it for less … careful, don’t just switch right away.
Oh man. This one is so hard. Real life instance … I just learned that I can get all my payroll processing done for about 3x less than I’m paying now. That’s a significant monthly savings and annualized, would save me well over $2,000 next year.
It’s tempting to want to switch and pay less immediately, however, a more appropriate time would be beginning in 2018—an easier transition for me, my employees, and my accountant to manage.
If you find a product or service for less and can easily make the transition, start paying less now. But, if it would make sense to wait and start at the beginning of the year, wait and save on extra headaches.
2. Being too optimistic … overestimate your costs.
It’s always a little sobering when you take a look at your total spending from the previous year and realize you’ve completely overspent in some categories. For me, this happens when I look at things like spending on promotional items that we gave away, and costs associated with putting our big events together.
It can be easy to be too optimistic and say, “Well … that event cost so much money, we’ll have to cut back next year.” But, can you? If you had to rent equipment to hold the event, will it be less next year? Maybe ask yourself if you purchased equipment, would that be a better investment and use of your money? Would you end up saving?
A great example of this for my studios is renting sound equipment for our Pop Up classes. We were renting equipment from a local company and each time it was costing between $200-$400 depending on the type and amount of speakers needed. Earlier this summer, we decided to buy the same equipment we were renting for about $450, which paid for itself after 2 events. A wise use of funds and money that we can save next year as we book more events outside of the studio.
3. Just forecast the big expenses … lots of small expenses can add up quickly, forecast everything.
We’re all pressed for time as business owners, but that doesn’t mean you should cut corners on your budget and only forecast your big expenses. Honestly, that really doesn’t make sense because most of your big expenses are likely fixed—meaning line items like rent, utilities, your salary, insurance, are defined as costs that don’t fluctuate as your sales increase or decrease—they remain fixed and predictable. As in, you already know what they are!
Variable expenses, however, do fluctuate with an increase or decrease in sales, so you should be careful to factor those changes in your budget.
And lots of small expenses can add up quickly to big numbers. $250 here, $500 there, eventually that adds up. It’s important to scrutinize everything to make sure you’re not overspending or paying for subscriptions that you aren’t getting a lot of value from.
4. Reinvest cash right away … whoa, create an emergency fund first.
You’ve had a great month and finally have some money to pay for a larger expense for your business. Maybe it’s some new equipment or updating your space with new paint or furniture—before you make a big spend, create an emergency fund to cover your rent and other fixed costs for at least 2-3 months.
You’ll be in a much better position as a business owner if you have some flexibility with your cash. You never know when an emergency might arise. Like … clients forgetting to turn the sink off when leaving the bathroom and it flooded. Twice in 4 days. Yeah, that really happened to me this year. For heaven’s sake! Turn off the faucet before you leave the bathroom!
Fortunately, we have some flexibility to pay for unexpected events like this. And you should too. Do yourself a huge favor and create an emergency fund.
5. Stay with your book keeper or accountant because they are cheap … your financial professionals should keep pace with your growing business.
Maybe this seems like a contradiction to the first point. I mean, isn’t a budget supposed to reflect spending the least amount on all products and services for your business? No way! There is a time to save and a time to spend for good service and expert advice.
If you’ve had the same team of financial professionals since your business opened, now is an excellent time to review those relationships. If your business has grown significantly, you might benefit from hiring a better book keeper, accountant, and financial advisor. Set up some interviews and see what’s out there.
Last year, I totally overhauled my team of financial professionals and I am extremely happy with my decision to do so. I have a new accountant who costs more than my previous one, but he actually saved me about $6,000 by reviewing and amending 2 years of my previous returns. And I actually found a better book keeper for less—hot damn! That’s like tastes great and less filling.
In a nutshell, your team of financial professionals needs to be keeping pace with your business. If you elected to hire the least expensive back when you were starting out, it might be time to re-evaluate those relationships and hire someone who can actually add value to your business now that it’s bigger or more profitable.
6. Spend $0 on education … courses can have great value to your business growth.
Serious entrepreneurs have a budget for furthering their education. I’ve invested more in continuing my business learning last year, but I could do a lot better next year. My challenge—and I challenge you to do the same—is to create a monthly budget to purchase books, courses, or attend seminars that will help you grow your business.
I was fortunate enough to attend 2 business seminars this year where I left feeling re-energized to improve my business. And I’ve recently been accepted to Leadership Winston-Salem 2018, which will help me network with other local business leaders.
Bottom line—you need to invest in yourself and your business leadership education. Even if it’s $50 or $100 each month, set aside those funds and learn.
Not sure where to start? Check out this post where I give you my top business book reading list.
7. Keep your marketing on auto-pilot … be ruthless and cut marketing that didn’t work.
It’s so easy to just set it and forget it with marketing. You might do the same ad over and over again. Or keep advertising in the same ways because … well, they seem to be working. Really?! Have you been tracking your advertising and marketing campaigns to KNOW if that money is being spent wisely and bringing you in new business leads?
Since there are still a few months left in the year, this is a great time to be ruthless and actually track where your new leads are coming from. It’s as easy as keeping a tally of where new clients heard about your business. If you spent money advertising in a local magazine and no one is mentioning that advertisement, then … maybe it’s not working and you should use those marketing dollars elsewhere.
Remember, you are never obligated to keep purchasing advertising because you’ve always done it. Marketing and advertising dollars need to have a quantified return on investment (ROI). If any of your advertising is coming up 0, it’s time for a change.
8. Pay the government early … if you’re disciplined, keep your cash!
Warning: this tip isn’t for everyone! But … if you’re disciplined, keep reading.
Why pay the government early? Why give them an interest-free loan? If you are disciplined, keep your cash for taxes in a separate savings account to be paid out when your accountant determines your final tax liability for the year. News flash, getting a refund simply means you’ve overpaid the government and could have used that money for something else.
9. Remain anonymous to your bank … get a small business banker who can help you secure a line of credit.
If you don’t have a dedicated small business banker at your bank, look into getting one. When you have an existing relationship with a banker, things can be a lot easier for you and your business because you don’t have to stand in line with everyone else, you can simply pick up the phone or send off an email and get answers and great customer service. My banker, Tracy, at BB&T is amazing and she’s saved me so much time I can’t even quantify it. Really!
This goes along with #4. After you’ve created an emergency fund, it’s time to look at securing a business line of credit. The best time to ask the bank for money is when you don’t need it. Even securing a small line of credit—like $5,000 or $10,000—can give you piece of mind if something happens and you need fast access to cash.
This year, I established a line of credit for my business and it literally took an hour of my time. I can keep it undrawn for emergencies. I can use it to invest in my business. I can use it to invest in another business. Or I could refinance debt if needed. Establishing credit and using it wisely is really important. Go look into it!
10. Finish and forget it … keep evaluating your budget as the year progresses.
Creating a monthly budget is hard work, so you might be inclined to forget about it and not look at the document for a while. That would be a huge disservice to your business!
Now that you have a forecasted monthly budget, use it as a tool. Evaluate your forecasting each month.
Do you need to adjust for higher prices on products or services going forward?
Are you spending less than you thought and could reallocate some of those funds elsewhere?
If you totally busted your budget, why?
What happened that you could better plan for next month or next year?
Your budget is a working document. It’s a plan or a blueprint to help you out. Keep refining it and use it to be better prepared next time. And if you made a mistake budgeting, don’t beat yourself up. Learn from it, do better next time, and move on.
Taking the time to create a forecasted monthly budget is a huge advantage to your business as you start the new year. Invest some time now into creating a working document that will be a good tool to predict your cash flow and profitability. Avoiding the 10 items discussed will help you build a better budget and hopefully help you prepare for more opportunities for business growth.