The budgeting and business planning process is your opportunity to think strategically and evaluate external forces which could negatively or positively impact the profitability of your business. Most successful businesses create and maintain a rolling three-year strategic business plan and one-year operating plans designed to help realize planned growth while ensuring the business remains financially viable and competitive in an ever-changing business environment.
There are many complex but well known frameworks (SWOT, Key Success Factors Analysis (PDF), Porter Five Forces Analysis) all of which entail evaluations of both external and internal factors and trends. External factors include analysis of industry, competition, technology, economy, government regulations, cost and quality of supplies, and customer needs and purchase behavior. These frameworks also assess internal factors, such as quality of product and service, management and staff, operating and production capabilities, sales and marketing, and financial structure. As a small business owner or freelancer, you might wonder if your business strategies and finances need such seemingly complicated analysis. The answer is “No”, you don’t. But, every business, whether large or small, should implement and follow basic financial discipline including a budgeting and tracking process. Managing businesses with even the simplest budget can yield positive results.
We know small business owners and freelancers are too busy running their businesses and wearing many, many hats. They don’t have time or inclination for complex planning and budgeting. So, when we made Flare, we equipped it with the tools small business owners like you need daily – like invoicing, expense and bill payment tracking and bank transaction recording, but we added some powerful and easy-to-use tools, too—like budgeting—that makes planning for profit easy and even a little fun!
If you learn anything from this article, let it be that budgeting and tracking, at the very least, will help your better manage your business. Below, we present some things you might consider when building a budget and planning for optimal business performance.
The Humble Budget as an Analytical Tool
Budgets and forecasting revenue, expenses, profit and cash flow and then comparing them to what is achieved may seem simple enough, but simple as they seem, they are integral parts of quality strategic and operating business plans. Though words like “strategy”, “business plan” and “analysis” may seem very “corporate-centric” to small businesses, micro-businesses or freelancers, the basic methods can still be used to great benefit.
Small business owners and freelancers do not need to pay an expert nor follow a fancy framework for budgeting and forecasting. Answering the following questions will help determine where you can make changes that improve your business’s financial performance. While some may not apply to your business, many are common to all businesses -big and small.
Flareapps.com small business tips #033Ask Questions to Discover How to Improve Your Business Performance
Questions About Products and Business Strategy
- Do products and services you offer solve problems?
- Do products and services add value or otherwise satisfy customer needs?
- Are products as good or better than those of your competitors?
- Are your products offered at prices comparable to those of competitors offering similar products or services?
- Is there sufficient demand for your products or services at a price higher than the sum of the costs of productions and distribution? In other words, can you make more than the service or product costs you? If the answer is “No” then re-evaluate the product or service offering, or, reduce costs to increase your profit margin.
- Are you growing at a rate equal to or higher than the market growth? In other words, can the market support your growth or will you find yourself with products and services you can’t sell and staff you cannot afford?
Questions About Your Operating Capabilities
- Is the cost of production, distribution, sales, marketing, and facility rentals within industry norms? Can you possibly cut costs by finding more competitive vendors?
- Is your business overhead in line with comparable companies in your industry?
- Do you need significant capital reinvestment to remain competitive?
Questions About Financial Capabilities
Does your business generate enough cash from operations to:
- fund all current and planned expenditures and investments necessary to remain competitive (defend and grow market share and margin)?
- maintain an adequate level of reserve for unanticipated events or an economic down turn?
- repay debts and other obligations as they become due?
- provide a reasonable return on your investments?
The first step to building a small business budget is to know costs and revenue drivers and the relationships between revenue and expenses. While there are many complicated techniques, the simplest is to analyze three years of revenue vs. expense. The business budgeting tool provided by Flare Accounting makes it fast and easy to compare revenue, expense and profitability trends and budget vs. actual performance. Flare auto-calculates and presents expenses as a percentage of revenue. It also shows the variance from one year to the next—both as a percentage and dollar figure.
If you are not a new business, look back over a year or even compare month to month for a start.
As you can see from the short video below, Flare’s budgeting feature makes the work of comparison very easy.
As a sanity check, you could compare your business’s revenues and expenses to those of other businesses in your industry (known as a “benchmark”). If you’ve run similar businesses in the past, you can use those figures as a benchmark.
Identify differences with benchmark and historical performance, investigate root causes of increases or decreases and reduce, eliminate or reallocate expenses as appropriate. In this step, stay focused on adequately funding expense categories to support your business objectives.
Automate Your Budget
Creating, monitoring and managing a budget can be time consuming. If you have to hire a financial consultant, it can also be expensive! Fortunately, Flare online accounting software comes equipped with an easy-to-use budgeting feature that makes creating and monitoring a budget fast and easy. We made Flare accounting software for small businesses and freelancers—providing all of the tools needed to help you succeed. Not only will Flare let you easily create electronic invoices, send estimates, and track expenses, it also has an ever-present dashboard which displays key financial performance metrics and a summary of budget vs. actual performance—both updated in real time.