Small businesses don’t budget — or at least that’s the overall consensus I get from most small-business owners. Outside of the vague, “I need six thousand to cover operating costs” or “Sure we have a budget, it’s somewhere in the filing cabinet,” there’s not much budgeting happening in the small-business world.
Effective budgeting is likely nonexistent because the business owner lacks oversight. Setting a budget and then ignoring it might be worse than not setting one at all. Budgeting is so fruitless for small businesses because they are not using the right strategy. Many small businesses stop after setting a budget and don’t develop a whole strategy to implement and reinforce the budget.
Over the years, I’ve experimented with a variety of systems to manage small-business finances from the ground up. In all businesses, the treasury department deals with management of funds. Large businesses have many people with many checks and balances to inhibit misappropriation of funds. For most small businesses, the whole treasury department starts and ends with the owner swiping a debit card.
Depending on how defined your treasury process is, there are different systems to consider, each with their pros and cons. So how can small-business owners budget without hamstringing their operations by having to wait days for approval from the accountant? The best small-business budgeting strategy is to use a cash-only budget based on checking accounts.
While this system is easy to implement, it does require some cash to float. The implementation requires setting up checking accounts for each of your major budgets. You split up operations into three to five distinct budgets with separate bank accounts. To save on constantly funding the accounts, you accumulate all your deposits in one account and fund your budgets every two weeks or preferably once a month.
The benefits of a cash-only budget
- Instant feedback. If you go over budget, you overdraw your account, so you will immediately know. This allows you to quickly spot any runaway budgets and forces you to take action instead of ignoring the problem. Conversely, if a large balance builds up, you know your budget is too generous.
- Increased focus. While you may have a spreadsheet budget with 20 accounts, it’s unlikely that you’ll have 20 business checking accounts; this uniquely forces you to stick to three to five major accounts and provides you an increased focus to keep your budget lines relevant to your business.
- Hard money. Unlike a nebulous spreadsheet with “money” that you track and reconcile periodically, a cash-based budget in bank accounts has a distinctly weighty feel. If the money in your marketing-budget account is already there, you know you can spend it without wondering if it’s destined for some other expenditure.
- Forced action. When you track a budget on paper, you will periodically reevaluate and decide how to adjust, but there is no pressing action to take if you go over. On a cash budget, if you find yourself frequently transferring money between accounts for going over budget, you’re much more inclined to fix the problem before it spirals out of hand.
Of course, no system is perfect, and there are some drawbacks. Fortunately, some of this system’s limitations can be overcome. It will be up to you to decide if the benefits outweigh the costs.
The challenges of a cash-only budget
- Constant adjustments. If from the outset you don’t get your numbers close enough to reality, you can be in for a rough start with constant adjustments. This is both a hassle and a rude awakening that shows how off we can be when it comes to what we think we spend versus what we actually spend.
- Loss of detail. Using checking accounts restricts your number of budget categories, which, when compared with a paper budget, limits the amount of available detail. This will have to be a tradeoff unless you want to do a mini budget for each of your checking accounts.
- Cash heavy. To set up this system efficiently, you will need two to four weeks of cash to fund your accounts. You can do with a smaller amount, but it will require more frequent funding and diminishes the overall efficiency of this strategy.
If you’ve tried budgeting in the past with no success, I encourage you to give this system a try. With so many online banks, setting up multiple accounts is expedient and easy to manage. As a small-business owner, you should always strive to make your business more efficient, and this is the best budget strategy to make that happen.
The post How a Cash-Only Budget Could Be the Breakthrough Your Small Business Needs appeared first on Entrepreneur
Original source: Entrepreneur