Pricing and cost issues are the most significant reasons for small business failure. According to Alan Safahi Orinda, an experienced entrepreneur, a business losing focus and running out of cash will experience a bad fate. However, Safahi says small business owners can prevent these issues by creating a realistic budget. Read on!
Analyze Costs
Research your business’s operating costs before drafting a budget. Safahi recommends knowing your operational costs inside and out because it gives you the baseline knowledge to create an adequate budget or spending plan.
Focus on your budget’s fixed, variable, one-time, and unexpected factors. Examples of a fixed budget include mortgages, rent, salaries, accounting services, insurance, and the internet. Variable costs are the cost of goods sold and labor commissions.
Estimate Your Revenue
Many startups and small businesses have failed because they overestimate revenues. Safahi argues that companies that borrow more cash can meet their operational needs, but at the same time, they fail to create a solid budget.
Therefore, analyzing previously documented revenues is essential to keep things realistic and objective. Alan Safahi recommends tracking your small business revenues periodically bi-monthly, monthly, bi-annually, and annually.
When you analyze the previous revenues, they give you a reference point for the following year. So, focus on the empirical data and use financial tools to examine thoroughly. The purpose is to make informed decisions and set realistic goals for your business growth.
Evaluate Your Gross Profit Margin
The gross profit margin refers to the money or cash you have after your company has dealt with expenses at the end of the year. The purpose of evaluating gross profit margin is to generate insights and achieve a stable financial status for your small business.
For example, if your company has generated $10,000,000 in revenues but still has debt problems, you have more expenses than the revenue generated. According to Safahi Orinda, this can negatively impact your business.
Therefore, identify the expenses that deteriorate your business operations and determine ways to eliminate them. Listing out the cost of goods sold for materials and deducting them from your overall sales revenues is the best way to mitigate this issue.
Focus On Cash Flow
Vendor and customer payments are two integral components of your business cash flow. According to Alan Safahi, owner of a successful startup company in San Francisco, you must balance these components to optimize the cash flow in your business.
The best way to do this is to ensure timely customer payments and have flexible terms to receive payments via common channels. Develop a solid strategy and deal with customers who fail to comply with the defined terms.
So this will help you create and maintain a reliable budget, mitigate risks, and increase your revenues. You can hire a financial expert or advisor if you don’t understand how to streamline the process.
Originally Posted: https://alansafahicontracosta.wordpress.com/2022/07/25/how-create-a-realistic-budget-for-small-business/
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