Setting up a home-based business can be the road that leads to early retirement, or it can be the road that leads to financial ruin. Often the number one stumbling block for any small business owner is the lack of cash flow. This often happens when a cash flow budget is either not in place or underestimated.
Your cash flow situation can be better managed and sub-standard budgeting can be avoided by doing proper research. You need to list anything that is a likely expense for your business, as it is easy to miss various costs when doing your first budget. A business owner only tends to look at the mark-up of his product as profit. Profit should only be calculated once the expenses have been taken into consideration.
Things to bear in mind when creating a cash flow budget for a small business
In the case of a home-based business an example might be starting a business that bakes cakes for cafes and coffee shops. You will need to include the following:
- You need to include the cost of the ingredients under cost of sales
- Delivery costs such as any fuel used to deliver the good to the customers
- Electricity and gas will need to be included in Utilities
- Don’t forget the packaging costs
- Any printing and stationery you use in your business
- Telephone and website costs
- Hiring costs for the assistance you need
- Maintenance costs for the fridge, oven, computers, etc.
- Advertising and marketing costs
Important reasons why your cash flow budget may be inefficient
- The main reason is not giving adequate consideration to all the costs you are likely to expect. Add an amount for contingencies and whatever number you think of, double it as you are sure to have forgotten something.
- Unfortunately, creating a cash flow budget can turn into a nightmare for some business owners as they suddenly become aware that money is tight. It is often hard to face the realism that the numbers just don’t add up. But this is opportunity. If you’re not making a profit, it might means that your marketing is ineffective, or your production costs are too high or maybe your selling price of the product needs to be increased. Working on your budget diligently will help you discover items that might otherwise becoming very costly.
- Small things add up: Small purchases that do not directly relate to the business can be damaging particularly when getting the business off the ground. The business will ultimately fail if your budget is not in surplus. Lack of cash flow is a major cause of small business failure.
- Too much income from too few customers: If most of your income comes from one or two customers, you stand the risk of major loss if something goes awry. You simply cannot afford bad debts in the start-up phase of any business, particularly yours.