Setting up a home-based business can be the road that leads to early retirement, or it can be the road that leads to financial ruin. Often the number one stumbling block for any small business owner is the lack of cash flow. This often happens when the budget is either not in place or underestimated.
By doing proper research, poor budgeting can be prevented and the cash flow situation can be better managed. Any item that is a potential expense for a business needs to be listed, as often the cost of the production is not taken into consideration when a business is started. A business owner only tends to look at the mark-up of his product as profit. Profit should only be calculated once the expenses have been taken into consideration.
Things to bear in mind when drawing up a cash flow budget for small business
We learn from examples so a perfect example of a home-based business for illustrative values would be starting a business that would bake cakes for home industries and other retailers. The following will need to be taken into consideration:
- The cost of the ingredients needs to be listed on the cash flow budget under cost of sales.
- Any fuel used in the delivery of the cakes to the retailers will need to be allocated to fuel.
- The utility consumption will need to be documented, for instance gas or electricity.
- Packaging will need to be added to your cash flow budget.
- Any stationery you use for your business.
- The cost of running your website and telephone.
- Cost of hiring someone to help out.
- Cost of maintenance to the oven, fridge, etc.
- Cost of advertising and marketing.
Important reasons why the cash flow budget may be inefficient
Many business owners have admitted that they do not have a budget in place as they find them to be inefficient. Budgets need to be meticulous and detailed to be successful.
What you don’t know can’t harm you: for many business owners, actually putting the numbers down on paper have ended up giving them nightmares, therefore they have decided that ignorance is bliss.
Often it is hard to face the reality that the numbers don’t add up. If you’re not seeing profit, it often means that the production process is too costly or the sale price of the product is too cheap. Working on your budget daily will ensure that you pick up items that end up costing you a fortune.
The tiny things add up: buying something small here and there which does not form part of the business can be detrimental in terms of getting it off the ground. The budget needs to work out, or else the business will not be able to continue. Of the 95% of new businesses that fail, the majority of them were due to a lack of cash flow.
Another common problem area is when more than a third of the income comes from one source: this is very dangerous. If your biggest source of income is from the same company, you stand the risk of major loss. Making provision for bad debts is practically impossible at the start-up phase of any business.
So you may be wondering about how to create and manage a cash flow budget. Here is a great small business accounting software tool to create a cash flow budget and prepare your accounting records.