plura Financial Blog

blog for plurafinancial.com, an online matchmaker between banks & small businesses

How to Budget for a Small Business

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Cash is king.  Liquidity is the single most important aspect of a business; it is the life blood keeping your business alive.  Liquidity can be found in several ways:

External Sources

  • Equity: The initial period most business involves a certain amount of cash burn.  Estimate how long you believe you will generate more expenses then revenue, double that number, and try to start your business with that amount of equity; things always take twice as much time and money as you think.
  • Line of Credit.  It’s always best to get a line of credit when you don’t need one.  A line of credit will help you fund the time-gap between paying for inventory and receiving the cash from the sale of your product.

Internal Sources

  • Collecting A/R faster: hire a dedicated collection person.  Revenue means nothing in the absence of collections, and you’ll likely be too busy finding new business to manage collections on your own as the business grows.
  • Turn inventory faster: if you have any stale inventory, sell it for a discount.  So long as you sell it above cost it won’t hurt you, and the liquidity will give you flexibility.
  • Pay A/P slower.  Generally not a good idea, but in a pinch call your vendors and let them know you need to hold a payment for a couple weeks.  A courtesy call will go a long way; after all, you wouldn’t want to be surprised by a late customer payment!

To preserve liquidity you should do the following:

  • Create a 13-week cash flow forecast to ensure you don’t run into any unforeseen cash flow problems.  Keep a weekly spreadsheet of your projected cash flow side by side with actual cash flow.  This is basically doing a cash-based weekly financial projection.  13 weeks ensures that you always have monthly/quarterly debt payments forecasted. Look at your A/R aging report to determine when cash is coming in, and look at your A/P and checking account to determine when cash is going out the door.  If there is any shortfall, be sure you have room on the line of credit.
  • Finance equipment purchases.  Even if you think you have enough cash to pay for new vehicles, equipment, etc. with cash, you may need that extra liquidity down the line; a little extra interest expense is worth the peace of mind that you have excess liquidity to survive and advance.
Brandon Hinkle
www.plurafinancial.com

Disclaimer: plura Financial is not a financial advisor and you should discuss any meaningful changes in your financial practices with your accountant/lawyer; these are just some best practices that management has learned along the way!

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Written by entrabanker

November 8, 2011 at 10:41 pm

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