Out of the top ten reasons startups fail, running out of cash was second only to lack of market. That’s 30% of businesses running out of money and shutting their doors.
Now, do you think that all 30% knew they would run out of money? No. They surely thought they had borrowed or raised enough capital to run a business. Why else would they take the risk?
What gives? Why do 30% of small businesses run out of cash and shut their doors?
The answer is fairly simple. It’s the same reason anyone goes broke. Financial mishandling.
Perhaps most of those people created a budget. If they did, what did they miss? Most likely, they budgeted the for the wrong things or budgeted the wrong amounts.
Today I’m going to show you what’s really important in business budgeting so you are less likely to end up like the 30%.
Prioritize Sales and Marketing
How will you make money? Your building doesn’t make you money. Your computer, your phone, your employees, your website. Those things don’t actually make you money.
The only thing that actually makes you money is your product or service. Everything else supports that thing you’re doing or selling.
If you’re building a running store, first thing on your budget should be inventory. This means doing research on demand. Look at local running stores in neighboring towns and cities. What are they selling, how much are they selling, and how much are they overstocking to stay current with demand?
If you’re building a marketing company, the first things you budget are your skills or your employee’s skills. You’ll invest in training, certifications, etc, etc.
Marketing Is Almost as Important
Marketing is almost as important as inventory or services. How are people going to know about your product or service?
Unless you are opening a store in a busy downtown metro area and plan on relying solely on foot traffic, you need to market your wares or services. How are people on the other side of town going to know what you do or sell?
My local running store ran into this problem. They came from a larger city and ran their other store in a busy suburban/commercial area. They mainly relied on visibility.
When they came to Walla Walla, they chose an out-of-the-way location. Thus, it would make sense to market like crazy. They didn’t. Their budget went to rent and putting on small events for the few people who knew about the store. Were they hoping for word of mouth advertising? Who knows. But it was apparent that their budgeting priorities were out of line with success.
Cost Vs. Effectiveness
When budgeting for marketing, be sure to balance cost with effectiveness. For example, social media marketing, while time-consuming, is the most effective for the least number of dollars. Whereas, print mediums might be more expensive and less effective depending on your situation.
Lastly, consider ROI. You might think you should skimp on marketing because your products are services are more important. You will be less tempted to skimp on marketing if you can estimate the ROI.
How do you calculate ROI for marketing? The simple answer is sales growth minus marketing expenditure. But you’re just starting out, so you’ll need to do research first.
Find out what the sales growth of the average business in your niche might be. Then find out how much each of your chosen modes of marketing might be.
Then you’ll be able to calculate your ROI correctly.
Expenses Are Your Third Consideration
Expenses are a slightly easier line to budget as they are easier to forecast. Things like rent and hourly wages are fairly simple calculations.
There might be some things you haven’t thought about. How much is technology going to cost? In your technology budget, don’t forget about the cost of taking credit cards through whatever mode you choose.
Speaking of technology, don’t forget the fact you’ll need I.T. Services once in a while. For example, if you go through a business like charlotteitsolutions.com, you might want to sign up for a 24/7 service that allows you to keep your website running when you might be selling items to people on the other side of the globe.
Other considerations when creating an expense budget might be payroll. This includes taxes and employee benefits.
Payroll is the most difficult to predict. This, like most areas of business, requires research. How much do you need to pay in order to bring in the right talent? Ask around about market rates for your business niche before starting on this budget.
If you work from home, budget for the home office. You might need a powerful PC or various lighting solutions or drawers and containers for documents.
Don’t forget professional services either. You might need an accountant or a lawyer to help you with the legal side of the business.
Within your expense budget, you’ll have to budget for capital expenditure. These are the things you can liquidate if you bomb out.
These things often depreciate and you’ll have to eventually replace them. Thus, you should find out how long certain tech lasts and find out how often you’ll have to replace if you spend x-amount vs. x-amount and whether the higher amount for fewer replacements is worth your time.
If you took on debt, you’ll have to pay interest on your payments. Be sure to include that on your budget even if it’s “built-in” to the monthly cost. You’ll want to see your interest payments and see them clearly enough that you push to keep out of debt as much as possible and get out of debt as fast as you can.
Taxes can tank a business. The government wants a piece of the pie and you’ll have to give it to them whether you like it or not. I won’t go into detail here, but just don’t forget it.