Every entrepreneur has something that empowers them to keep working on their business every day. Year by year, business owners plan and execute strategies towards meeting short-term and long-term goals. However, not everyone seems to include cost reduction strategies in their agenda.
A Clutch survey revealed that only 49% of businesses have created a budget. Out of all the respondents interviewed, it’s been found that small business owners are more prone to neglect financial planning. Of the ones who did plan, nearly half went over their budget. This is unfortunate news because setting a financial plan is critical in achieving business aspirations.
Why Entrepreneurs Skip Budgeting and How It’s Detrimental for Business
The ability to make money from home and run a purely virtual business has given people from all backgrounds and financial abilities the confidence to become entrepreneurs themselves. The media is rife with stories of ordinary people creating money-spinners from a $1,000 capital. Stories like this give people the impression that starting an online business is the ticket to getting out of the 9-to-5 grind.
Anything that resembles working under corporate regulations – such as operating on a budget – is usually left on the back burner. However, it is budgeting that eventually leads businesses to financial freedom. It is the arduous act of creating cost reduction methods that separate long-standing businesses from failed ones.
Without a budget, a business has no benchmark for achieving goals and assessing performance. While goals signify the end of the road, it is financial planning that leads you there and right now offshore outsourcing seems to be working just fine. When you know how much money goes where, you have stronger control over your business cash flow. A company devoid of solid financial planning is likely to shell out more funds than intended and create problems that could have otherwise been avoided. Suffice it to say that financial planning is akin to planning for your brand to succeed.
So, how can cost reduction strategies lead to your eventual success? How do you allocate funds so as to cover your expenses and grow your business at the same time?
Check out these 3 budgeting strategies below:
1. Use Financial Forecasting Tools
One of the most common reasons that a company fails is insufficient funds. There are different factors that lead to businesses running their finances dry. It could be that the owner has failed to appreciate the day-to-day expenses of running a business. It could also be that the company is spending more money than it makes.
This is where financial forecasting comes into the picture. Financial forecasting is the process by which entrepreneurs estimate their future funds, while taking budget and revenues into consideration. Financial forecasts help companies prepare for the future, so that they can avoid overspending and allocate their funds accordingly. Just as importantly, predicting how one’s company will perform in the future helps owners set their expectations realistically as far as revenues are concerned.
To help you with this crucial business function, here are different tools to consider:
- Forecasting Templates. Are you adept at using and manipulating spreadsheets? If so, forecasting templates like Score will help you project profits, design a future income statement, work out a balanced sheet, and predict business cash flow. Score has a simple interface, but it also provides tutorials to help people with little to no experience with spreadsheets or accounting learn the basics. The template also gives entrepreneurs data for break-even analysis and service pricing.
Futurpreneur is another forecasting template to consider. Just like Score, this forecasting tool also helps entrepreneurs map out their future funds through a user-friendly template. Futurpreneur gauges upcoming sales by considering pricing, seasonal variations, and marketing campaigns. As a platform aiming to help startup entrepreneurs, Futurpreneur provides users with video tutorials on how to use its cash flow template.
- Float. More than just a forecasting system, Float gives entrepreneurs an in-depth analysis on how specific actions can affect their companies. Users can tweak different parameters to test the feasibility of their business ideas. For example, if you’re thinking about hiring an assistant, Float will help you analyze how practical this decision would be considering budget and revenue projections.
- Expensify. During the early years of a company’s life, tracking expenses is easier than tracking income since assessing expenses helps differentiate fixed expenses from variable ones. Expensify is a tool that assists entrepreneurs record, manage, and predict future business costs. Using it will give you insight on how you can control spending and allocate funds more strategically.
2. Consider Contingencies
‘Expect the unexpected’ may sound cliché but it is key for setting a sound budget. In fact, your cash flow projection would only be realistic if it includes backup plans for uncertainties such as delinquent payments and seasonal declines in sales.
So, how do you prepare for some unforeseeable events? It’s best to start with their general sources:
- Late payments. Busy schedules, lost bills, and plainly forgetting one’s due date – there are many reasons why customers pay late. However, some customers are habitual late payers or delinquents. To avoid delinquencies from messing up your cash flow, set strict regulations for late payments by adding penalty fees on top of service charges or cancelling subscriptions. You can also offer incentives for early payments or work out a solid retention plan to encourage customers to pay on time and maintain their subscription.
- Seasonal sales dip. To map out your funds rationally, you must consider the seasons when sales are just moving slow. When you do, you can portion your spending for peak months and lean months more appropriately. Tools like Purchase Control help ensure that budget, inventory, and production are planned according to market demands. Because different brands have different peak and slow seasons, Purchase Control can be used to prepare cash allocations on a monthly, yearly, or per-project basis.
- Miscalculations or human errors. Paying for something twice because you lost an important document, overlooking a message that led to customer loss or backlash. Human errors are inevitable in business and sometimes, they come at a high cost. That’s why it’s important to seek solutions to minimize, if not diminish, mistakes that people tend to make. Automating tasks is one such solution.
Here are a few things you can do:
- Ditch paper and switch to electronic storage and processing. Studies show that it’s more expensive to file, record, and work on paper documents than it does to do the same tasks electronically.
- Use Customer Relationship Management (CRM) software. Marketing campaigns for existing customers are more affordable and effective. To make these campaigns, however, you need CRM tools or software to personalize offers and target the right market. Platforms like Salesforce and Maximizer CRM have plans to help SMBs develop better customer relations.
- Simplify client tracking and on-boarding. Imagine working night and day on your online business marketing campaign but failing to take prospects on board. That’s what’s bound to happen when your client onboarding process includes several manual steps or inventions. You can automate this instead by using tools like Zapier.
How it works in a nutshell: prospects leave their info in a business site, they receive a welcome email from the brand, the brand collects and sends the prospect’s data throughout its different platforms.
3. Use Technology to Streamline Your Expenses
Below is a list of incidentals that entrepreneurs pay on average:
- Payroll – 50% of budget
- Inventory – 25% of budget
- Real estate/office space – $1,000/employee every month
- Office suppliers/furniture – 10% of total budget
- Utilities – $2/square foot of workspace on average
- Travel – variable ($900-$1000 annually on airline, hotel, and other expenses)
Working with a virtual assistant (VA) is one of the best ways to use technology to streamline your expenses. More importantly, it’s a cost reduction strategy that results in better work output.
Apart from being relieved of financial responsibilities like payroll, employee insurance, real estate, and utilities, you also get the chance to work with industry experts.
The result: you get tasks done by industry experts on terms well within your finances.
Another way to leverage technology in your cost reduction action plan is through webinars. Yes, you can attend or tune in to important industry conferences through webinars. But you might also want to consider going this route to convene with your business partners instead of meeting up and launching a product instead of hosting an actual event. This way, you can save on travel, venue, and logistics costs. Examples of popular webinar tools are Gotowebinar, Zoom, Hangouts, and Anymeeting.
Achieving business growth isn’t the result of a stroke of luck. You make your way through it by following seemingly small, everyday tasks such as keeping to your budget and reducing costs where you can. Start by following these 3 budgeting strategies today.