Cash flow challenges are the fundamental reason why companies that fail go under.
If you are seriously interested in making your venture profitable, then controlling your money effectively is crucial to this success.Freelancing, services based as well as product based organisations these days remain prosperous in this current economic environment to the same degree to which people recognise the value of how vital it is to continuously monitor business charges in order to stop overheads getting out of control.
When establishing a new company it might seem hard to put together a budget without any financial history on which to base income and costs. However a business plan, before you even start, with some idea of expenses and turnover is essential to evaluating the viability of a business, even if you are just planning to setup a home based freelancing business. It might seem like guesswork to start with, but a tentative budget can be established with some thought and projections of future business. From some past experience in refurbishing houses, I always say ‘think of a figure and double it’ and then you will be near the mark. I think this is true for other companies, because it’s human nature to underestimate what we need to spend and over estimate what we will earn.
Our electricity prices comparison business, as with any business, has two distinct categories of business finance, income and expenses.
Under the expense category there can be other sub-categories mainly falling into two distinct areas of controllable expenses and uncontrollable expenses. While many business proprietors and freelancers believe they can control every cost involved in their business, this is not generally the case. Some things such as services costs, the amount of rent and other supposed fixed costs can, and do change, with the owner having no control. For example the recent increase in oil prices are an example of this and have been the reason a number of small airline and transportation businesses going out of business as their fuel costs skyrocketed.
Other expenses such as payroll, insurance and building repairs can be subject to a budget, but they are considered controllable expenses. If the sales begins to fall off, you can control some of these costs by making redundant employees and cutting back on marketing. However, living by a budget may help maintain profitability but could also be counter-productive in the long run.
Depending on the viability of your company it may be a better investment to bite the financial bullet on employee wages and still provide excellent customer service to the remaining customers until business picks up again, or consider outsourcing and freelancing for when you need a bit of extra help but without having to hire new staff. If no one supports of the customers, it will not be long until there are no more clients to care for.
There are two ways to budget your business money and these are through set amounts or as a percentage of sales. Many businesses will budget their controllable expenses by the pound and non-controllable by percentage of revenue. Obviously a good part of the owner’s time is going to be based on bringing money into the business and how much they have to spend on controllable expenses will be in direct relation to sales. With any upturn in business the owner will probably need the extra help to take care of the business so a percentage of income will go to more wages, thus freeing the owner to focus on generating additional income.
There are many other costs that fall into the payroll account such as worker’s compensation charges, National Insurance tax paid by the employer and paid holidays time or other staff benefits determined by the law. These need to be calculated into costs when recruiting new employees into the business, unless you make extensive use of outsourcing organisations.
While you may think a budget is hard to establish for a new organisation, it is essential to establish a healthy and sound financial foundation on which success can be built for the future.
About the Author: Roger Davies, the Managing Director at advanta Productions an e-commerce, web design and SEO company in the heart of the Nottingham, Derby and Loughborough business community has overseen the team that has created and published hundreds of websites. If you don’t know where to start with your website development or don’t know how to advertise or sell on-line don’t worry contact Roger at Advanta on 0845 22 55 805 or via the website.
