The budget is the plan for your business and a great tool to make sure the business is on track. A good budget shows how changed conditions affect your business and is a good help when deciding on what actions to take. There are different types of budgets and different scenarios to use.
Make an operating budget
The operating budget is the financial plan for your business. Stress test the budget by making three versions based on three different scenarios: best case, worst case and one in the middle of the two. That makes it possible to evaluate how well the budget holds against challenges. This also provides a back-up plan and helps you to make the right business decisions if things do not go as expected.
Make a cash flow budget
It is important to also create a cash flow budget. Cash flow problems are a more common reason for new businesses to fail than problems with profitability.
A cash flow budget should include:
- Sales forecast going forward as long as possible.
- Forecast of the cash you anticipate flowing into your business.
- Forecast of the cash you anticipate flowing out of your business.
- Overview of all three forecasts put together to show your cash flow bottom line.
Get more out of your budgets
Use the budgets in day-to-day work to be on top of the finances and spot changing trends or new risks in time. This can be the difference between success and failure. Many successful businesses check their budgets monthly or even weekly. Find a good routine that suits you, and rather check more often than needed than the other way around.
How large should your cash buffer be?
Having a cash buffer will provide your business with a soft pillow to land on if you run into tough financial times. Just make sure to keep a balance between the security of a cash buffer and using the money to make good investments for your business. Finding the right size of the cash buffer is important to make sure you use the money in the best way possible.