Creating a Rock Solid Budget For Your Business in Less Than Six Months – Part One

October 18, 2009

For some business owners, maintaining a budget that actually works is something that eludes them. Having a good budget is essential for keeping your working capital high, for avoiding the pitfalls of cash advances and business loans. One of the main challenges that come along with creating, and sticking to, a good budget is that it has to become a habit. Some business owners have a budget, but they have started to rely on their credit card processing and other lines of credit when their working capital is too low or non-existent.

For some business owners, maintaining a budget that actually works is something that eludes them. Having a good budget is essential for keeping your working capital high, for avoiding the pitfalls of cash advances and business loans. One of the main challenges that come along with creating, and sticking to, a good budget is that it has to become a habit. Some business owners have a budget, but they have started to rely on their credit card processing and other lines of credit when their working capital is too low or non-existent. Other business owners have learned how to survive by keeping more money flowing in than is going out. But, neither of these solutions will last for the long term. Most businesses often use a budget as a last-resort when they have finally gotten tired of dealing with juggling their working capital and their expenses.

When a business is ready to make a budget, they normally sit down and make a few lists of what comes in and what goes out each month. They mark on their calendars when they will pay certain bills, and log in their books when bills will go out. They sit back, thinking that this is enough and feel good about themselves until this “budget” falls short of it's mark. However, there are actually several keys to creating a rock solid budget that your business can live with and stick to over the years. The first step in this budgeting process is to create an emergency fund for your business.

The emergency fund is the platform for your business budget and will help it create that rock solid foundation that it needs, and is the line that separates you between success and overdrafts and cash advances. Every business should have an emergency account for any “unpleasant surprises”, such as a fire, loss of inventory, insurance deductible, and so on. By starting an emergency fund, a business can “jump start” their budgeting process. Start by opening a money market account with the bank that your business uses, this way, you can add funds into your emergency account easily, and have that working capital that you so need.

This emergency fund will act like a safety net for the rest of your budget as it is put into action and can start to replace the use of credit cards and other lines of credit right away. It is for this reason that you need to start to build this emergency fund immediately. Once you start your emergency fund, then you need to continue to add to it every week, two weeks, or as often as you possibly can to continue to build upon your net.

Now, you need to know what is an emergency and what isn't, and this can get tricky. You should train yourself to only use this emergency account when there is a true emergency, such as when your office shuts down for the night but the midnight oil burns up your servers, or when your entire shipment of parts is destroyed in a hurricane and you have a monster order to fill in two weeks. Dipping into your emergency fund for items such as small expenses, a luncheon for your employees, or new uniforms don't count. A new credit card processing machine MAY be an emergency, but only if your old credit card processing machine is broken. If you're only dipping into your emergency fund to buy a new credit card processing machine because the new one is wireless and your old credit card processing machine works fine but isn't wireless, that's not an emergency. It may help to have the bank act as a buffer between you and your money by putting your emergency fund in a special money market account that will require you to wait several days or go through several steps to withdraw your money. These buffers can help you in determining if it is a true emergency or not.

Make sure that you don't use this emergency fund to simply eliminate your credit card debt. This might sound tempting, but you should have these cards around for other, smaller emergencies that don't require large amounts of money that can be placed in your emergency fund. With a good emergency fund, then you can keep your business afloat with extra working capital if something bad does happen.