Cash Flow Issues - Overspending

Last week I talked about “Cash Flow Issues - Tracking your finances.”  If you missed that post, you can review it HERE.  This week’s post is “Cash Flow Issues - Overspending.”  When you don’t do your books regularly and don’t have a well prepared budget to remind you of your upcoming expenses, you don’t really know what you have available to spend.  If you have an annually billed payment coming up next month, you don’t want to spend the money this month on something else that could have waited.  Your budget helps you remember these expenses..  Learn more in this week’s blog.

Overspending is another reason that small businesses fail.  While many owners say that they would never overspend, if they aren’t doing their financial statements (books) every month and using a budget, they can’t really say that.

Doing your books every month, or reviewing them after your accountant or bookkeeper prepares them, is important to your business.  It not only tells you whether you are making money or not, it also helps you spot inefficiencies and spending trends that are hard to notice without them. 

Do you know what you spent last month on supplies compared to this month?  Comparing your income statement from month to month will show you that.  Is your revenue up or down?  By how much?  If it has changed, why has it changed?  Until you see the numbers, you don’t know what questions to ask that will help you improve your business.  You don’t realize that your expenses are creeping up, creating overspending that will hurt your cash flow and your business.

Your budget is an important tool for measuring your spending levels.  If your profit for the month is supposed to be 10% of revenue and it comes in at 8%, you have a 2% difference that you need to understand.  If it is a onetime event that is not going to affect you for more than that one month, that may be something you can accept.  But if that difference is an overspending issue that is going to continue every month, you need to understand what the issue is.

You could have an error in the preparation of your budget.  In that case, you may need to adjust your spending in another area so that you come out at your profit goal for the year.  You may have an increase in the cost of your materials that is going to continue.  You may need to change suppliers or make other adjustments to get that back in line.  In either case, you need to be monitoring your finances every month to really know what is going on in time to do something about it.

Another benefit of having a well prepared budget is that it will help you see what expenses are coming up that you don’t have to pay every month.  If you pay your insurance annually, you don’t want to use the money to pay for that the month before it is due.  Small business owners have enough going on without having to remember annual payments in their heads.  Preparing a budget and using it to run your business gives you a system that helps you run your business better.  Well run businesses are more likely to succeed.

Take advantage of your accounting software.  Good software packages include the ability to enter and report on your budget.  The same thing applies to your accountant or bookkeeper.  If they can’t provide budget comparison data with your financial statements, find someone else to do your books.

Controlling overspending in your business is a matter of being diligent about projecting and tracking your finances.  Complete and review your books every month and take time every year to do a well prepared annual budget.

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God Bless your week!