If you are seriously interested in making your business successful, then managing your finances effectively is crucial to your organisation. Whether you run a work at home business doing administrative tasks, or manage a huge multinational company like Biffa the glass recycling giants, well managed finances and particularly healthy business cash flow are everything, especially in these difficult times where large companies will try to liquidate their own cashflow by delaying payments to suppliers. One large company who shall remain nameless at this stage has stretched their normally regular payments of around 30 days to 85 and 90 days. If our business was not so well geared that could have sent us under, fortunately we practise what we preach, we pay all our suppliers within 30 days of receiving their invoices and we don’t borrow, thank goodness!

When starting a new company it might seem almost impossible to put together a budget without any trading history on which to base a cash flow forecast. However having a business plan, before you even start a a business, with some idea of costs and revenues is essential to determining the viability of a business, even if it is all just estimates, and even if you are just planning to setup a work from home business. It might seem a bit like guesswork to start with, but an initial budget can be established with some careful thought and estimates of future sales. From my own past experience in renovating properties, I always say ‘think of a figure and double it’ and then you will be near the final figure. I think this is true for other businesses, because it is human nature to underestimate what we need to spend and over estimate what we will earn. If you have ever watched the Grand Designs program on Chanel 4 you will notice that in every case, without exception, they go over budget, a business is the same so always over estimate and plan to that level, if you have got it wrong then it will mean you have cash lef tin the bank which is never a bad thing.

Businesses always have two main categories, like my balloons company, income and expense. Under the expense category there can be several sub-categories often falling into two main areas of controllable expenses and uncontrollable expenses. While many business owners claim they can control every expense involved in their business, they are simply kidding themselves, as some things such as utility cost, the amount of rent and other so-called fixed costs can, and do change, with the owner having no control. (Recent oil price increases are responsible for a number of small airline companies going out of business, for example.)

Other expenses such as payroll, transportation and advertising can be subject to a budget, but they are considered controllable expenses. If the business begins to fall off, you can control some of these expenses by laying-off employees and cutting back on advertising. However, living by a budget may help maintain profitability but could also turn against you in the long run.

Depending on the viability of your company it may be a better investment to bite the financial bullet on employee wages and still provide good customer service to the remaining customers until business picks up again. If no one takes care of the customers, it will not be long until there are no more customers to care for.

There are two ways to budget your business money and these are through set dollar amounts or as a percentage of revenue. Many businesses will budget their controllable expenses by the dollar and non-controllable by percentage of income. Obviously a good part of the owner’s time is going to be based on bringing money into the business and how much they have to spend on controllable expenses will be in direct relation to income. With any increase in business the owner will probably need the extra help to take care of the business so a percentage of income will go to more wages, thus freeing the owner to focus on generating additional revenue.

There are many other expenses that fall into the payroll account such as worker’s compensation charges, Social Security tax paid by the employer and paid vacation time or other perks determined by the employer. These need to be calculated into costs when recruiting people into the business.

While you may think a budget is hard to establish for a new business, it is essential to establish a healthy and sound financial foundation on which success can be built for the coming years.

About the Author: Roger Davies, The Managing Director of Advanta a Nottingham Web Design company, has overseen the team that has created and published hundreds of websites. Don’t know how to build a website? No Problem! Don’t know how to advertise on line? No Problem! Roger and his team will build your site and promote it for you! Visit www.advantapro.com for details.