As many as 25% of new businesses fail after their first year. Between 2013 and 2014, 5.2% of surveyed businesses failed as a result of inadequate cash flow, and financial incompetence is the reason why 46% of businesses cease operating in general. Companies that have no knowledge of pricing, financing, or proper planning are doomed from the start. Do not let that be you.
That is why creating a budget is so important and the use of financial performance analysis tools is essential. Starting a budget from scratch is not easy. It certainly helps if you wrote one in the previous year, but if you are a beginner, here are some tips for building a fool-proof budget.
Develop a target
Begin by estimating a realistic profit you would like to see within the coming year. Consider factors that could affect your sales numbers such as the economy or market trends. Starting with profits will help you determine the rest of your estimates for costs, expenditures, etc.
If you have been in business for a while, look back at your previous financial statements to see how much you have spent in the past. Look at salaries, rent, postage, utilities, taxes, travel, etc. If this is your first year in business, you will have to calculate predicted expenses, but know that it won’t be entirely accurate.
Calculate gross profit margin
Estimate the cost of goods including beginning inventory, shipping charges, etc; subtract that from your overall sales.
After considering all of these calculations, you may want to go back and readjust some of your estimates. For instance, you may want to cut costs in areas like supplies or labor. Be prepared to make further adjustments to your budget throughout the year. Things change and you will need to be flexible.
Financial data analysis may not be your strong suit, and that’s okay. By using a budgeting and planning software, creating a financial plan can be made easy. If you have never done it before and you don’t know where to start, rely on a budget planning software program to interpret your financial statements and project estimated costs and revenue.