All small business owners know that good budgeting practices are the key to making the most out of the working capital available to your business, and to turning a profit even when margins can be at their tightest. A smart small business budget will account for all your needs, relationships and obligations, and will be aligned with your goals for the quarter, season or year.
No matter how good your budgeting skills, one of the only constants in the world of business is change. Budgeting is effectively an exercise in predetermination of certain financial factors, but what happens when they change? Interest rates, wage policies, supplier costs, property taxes, currency values, and even weather, among a large list of other factors, are all subject to change over time, and no one wants their small business budget to be caught unprepared. Small business owners need to be able to adopt dynamic, flexible budgeting practices in order to respond to the continually changing conditions of their market.
By their strictest definitions, a static budget is one that presets your expenses based on projections, and a flexible budget continually recalculates your expenses based on revenue. A flexible budget limits overspending by allowing you to re-allocate your resources as needed if revenues are below expected targets. Flexible budgets also let you tie spending to sales, allowing you to increase spending to take advantage of opportunities presented by better-than-expected revenues.
With a static small business budget, you are able to know how far above or below your projection you are at a given time. However, the younger your business is, the less data you have and the more time it will take for the data to paint a meaningful picture or trend for you to improve around. A flexible budget, which changes relative to volume, provides a real-time view of your business’ financial picture without the need for detailed longer term forecasting. Though it is more sophisticated to maintain a flexible budget, the effort will be worth it for many small business owners.