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Cash flow problems are the fundamental reason why companies that fail close down.

If you are serious about making your business a success, then managing your money effectively is critical to the security of your organisation. Whether you run a large or small business, success is dependent on carefully managed finances and a healthy cash flow, even just freelancing you will require an amount of up front capital sometimes, which requires a positive cash flow.

When starting a new enterprise it might seem hard to put together a budget without any financial history on which to base sales and costs. However a business plan, before you even start, with some idea of expenses and revenues is essential to evaluating the potential of a organisation, even if you are just planning to setup a work at home freelancing operation. It might seem like guesswork to start with, 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 businesses, because it’s human nature to underestimate what we need to spend and over estimate what we will earn.

Our electricity prices comparison company, like any business, has two main categories of company finance, the income and the expenses.

Under the expense category there can be other sub-categories usually falling into 2 distinct areas of controllable expenses and uncontrollable expenses. While many business proprietors and freelancers believe they can control every expense involved in their company, this is not always 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, transportation and advertising can be subject to a budget, but they are considered controllable expenses. If the business begins to reduce, you can control some of these costs by laying-off staff and cutting back on advertising. However, living by a budget may help maintain profitability but could also turn against you in the end.

Depending on the viability of your company it may be a better option to bite the financial bullet on employee wages and still provide good 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 clients to care for.

There are two ways to budget your business finance and these are through set amounts or as a percentage of income. Many companies will budget their controllable expenses 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 company and how much they have to spend on controllable expenses will be in direct relation to sales. With any upturn in business 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 revenue.

There are many other expenses that fall into the payroll account such as worker’s compensation charges, National Insurance tax paid by the business and paid vacation time or other perks determined by the employer. These need to be calculated into costs when recruiting new employees into the company, unless you make extensive use of freelancing services.

While you may think a budget is hard to compile for a new organisation, it is essential to establish a healthy and sound financial footing on which success can be built for the future.

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.