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Small Business Budgeting and Borrowing

By Ty Kiisel –

Over the nearly 40 years I’ve either owned or otherwise worked in a small business, I’ve observed that even businesses that might not be considered “seasonal” in the traditional sense ebb and flow over the course of the year, creating times when capital becomes tight and the cash flow pinch can cause an otherwise healthy business to struggle. In today’s world, small business budgeting and borrowing are more important than ever. I use these two words together intentionally, because I believe there is a synergy there for business owners who take a strategic approach to capitalizing their businesses.

A reactionary approach to a small business’ need for capital can satisfy a short-term need or meet an unanticipated shortfall, but it might not help the business grow. We see evidence of this in the failure rate of small businesses in our country. Of the 30 or so million small businesses in the United States, those that survive the first few years are far too few, and only 40% of small businesses are even profitable. What’s more, the most common reason for business failure is a lack of adequate cash. In fact, poor cash flow causes 84% of the business failures in the US.

Can You Anticipate Your Business Cycle?

This probably sounds like a gross oversimplification, but anticipating your business cycle is what the most successful small business owners are able to do — to recognize when a peak season ebbs and they need to accommodate for an anticipatable lag in income. This enables business owners to be more strategic and less reactionary.

Having spent nearly half of my career in seasonal small businesses, I came to appreciate, and anticipate, the seasonality of what I was doing and the need to plan for the times when I knew cash would be tight. But we still needed to keep the doors open to prepare for the surge of business that was coming in with the seasonal tide.

During the peak season, it’s far too easy to forget that it’s not going to last forever and become cavalier in managing cash. I’ve been there myself and understand. I had to learn the hard way that it takes discipline to invest in saving when revenues are fat so you can keep operations going (and even invest in the business) during a lean season. I also came to appreciate this budgeting restraint even more at the end of the slack season.

Depending on the nature of your business, budgeting could also include a lot more than your cash flow. Many businesses reduce staff during an “off season,” or reduce their business hours. We couldn’t do that, but we would invest in projects to keep busy during the slower seasons. That was when I painted our building, upgraded facilities or attacked major renovations — provided I had anticipated the season and had prepared to make the investments.

Being strategic allows you to invest when you have the time, but maybe not the cash flow. It also enables you to avoid the seasonal “crisis borrowing” that takes place in many small businesses, to bridge from one season to another.

Don’t get me wrong, borrowing to bridge the seasons can be a good strategy — provided it’s a strategy and not a reaction. I’m a big advocate of strategic borrowing because it’s easy to make poor decisions when you’ve got to borrow to meet payroll or pay your lease.

5 Ways to Make Budgeting and Strategic Borrowing Easier

It’s easy to talk about being more strategic, but it’s a lot more difficult to actually do it. Anticipating the business cycle is only the first step. Here are 5 things that will make taking a strategic approach to budgeting and borrowing easier: Click To Tweet

1. Create the Plan: You don’t need to wait until the first of the year to create a strategic 12-month plan — you can do it now. Plan for those times when you expect revenue to be tight and decide what you will do to compensate when cash is flush. Will you set aside a percentage of profits to tide you over or borrow to fill the gaps? Planning now will make it easier to execute at the time that best fits your situation, rather than reacting to the drop when it happens.

2. Stick to the Plan: Creating a plan doesn’t do anything if you don’t do anything else. I don’t think that means you follow the plan regardless of what happens. If situations change, you may need to adjust (or pivot) a little, but make sure you consider the costs of deviating from the plan and compensate for the changes.

3. Set Goals and Measure: Make sure you stay on top of your cash flow goals and consult with your accountant or another trusted financial advisor if you need help setting goals or developing ideas about how to achieve them. We tend to impact the things we pay the most attention to, so establishing goals and measuring performance against those goals will help you achieve them — even your cash flow goals.

4. Stay on Top of Your Accounts Receivable: Don’t let a day go by that you are not engaged in your accounts receivable aging. I know for many small business owners accounting isn’t their thing, but if you’re going to be strategic with your budgeting and cash flow, you have to be diligent here. It doesn’t take long for an overdue invoice to have lost all profit, and too many of them will start your business on the slog to going out of business. In my view, your AR is every bit as important as generating sales.

5. The Rainy Day is on the Way: Whether or not your strategy for the year includes borrowing, setting aside a percent of profits for a rainy day is just a good idea. There are a lot of unexpected business expenses that can easily be addressed if you have a little extra cash in the bank. Some of the smartest business owners I know regularly set aside some of their profits to ensure they have at least three to six months of operating expenses stashed away in the bank.

There’s probably nothing really new in the advice above, but I’ve discovered over the years that good advice doesn’t always have to be new advice. Taking a more strategic approach to budgeting and borrowing will help you become less reactionary, and help you build a strong and healthy business that will outlast your small business peers who ignored this advice.


Ty KiiselAbout the Author: Ty Kiisel is a Main Street business advocate, author and marketing veteran with over 30 years in the trenches writing about small business and small business financing. His mission at Nav is to make the maze of small business financing accessible by weaving personal experiences and other relevant anecdotes into a regular discussion of one of the biggest challenges facing small business owners today.

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