Cash flow problems are the fundamental reason why companies that fail go out of business.

If you are serious about making your business a success, then managing your money effectively is critical to this success.Even if you only have a simple home based freelancing operation, or manage a multi million pound company, tightly managed finances and a positive cash flow, are key factors in business success.

When founding a new business it might seem hard to put together a budget without any financial background on which to base sales and expenses. However a business plan, before you even start, with some idea of expenses and revenues is essential to evaluating the potential of a business, even if you are just planning to setup a home based freelancing operation. It might seem like guesswork at the beginning, 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 many sub-categories mainly falling into 2 seperate areas of controllable expenses and uncontrollable expenses. While many business directors and freelancers believe they can control every expense involved in their organisation, 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 electricity 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 reduce, you can control some of these expenses 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 end.

Depending on the viability of your business it may be a better investment to bite the financial bullet on employee wages and still provide excellent customer service to the remaining clients 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 customers to care for.

There are 2 ways to budget your business money and these are through set amounts or as a percentage of sales. Many organisations will budget their controllable costs 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 sales into the business and how much they have to spend on controllable expenses will be in direct relation to sales. With any increase in sales 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 company and paid holidays time or other perks determined by the company. These need to be built into costs when recruiting people into the organisation, unless you make extensive use of outsourcing companies.

While you may think a budget is impossible to establish for a new business, it is vital to establish a healthy and sound financial foundation on which success can be built for the coming years.

About the Author: Roger Davies, is responsible for the web design team at Advanta Productions. The company was incorporated in 2004 and provides website development and e-commerce web design services to businesses in the Midlands, specifically Nottingham, Derby and Loughborough areas. Advanta have worked on hundreds of website development and e-commerce web design projects for businesses successfully advertising and selling on-line. All enquiries on 0845 22 55 805 or visit the website.