Imagine rounding up to the nearest dollar every time you debit an entry from your checkbook. How much money would you find in your account to spend at the end of the year? This kind of overestimation creates slack in your budget and gives you peace of mind knowing that you’ve got a few coins tucked away for a rainy day.
What Is Slack?
You may be asking, what is slack and why is it important? The budget slack definition is when you intentionally underestimate your income and overestimate costs to ensure there’s extra money to deal with budgetary emergencies and make hitting your targets easier. Now that you know the answer to the question, it’s important to understand the business budget definition. Your budget’s a financial plan that you’ve created that deals with the revenues and costs of your business. The master budget definition is slightly different, as this term refers to a comprehensive financial plan that fuses together multiple smaller budgets.
Is Budgeting Slack Useful for Long-Term Accounting?
Budgetary slack isn’t a sustainable long-term accounting practice, as you must rectify and report accounts precisely at some point. The art of overestimating expenses creates a cushion between the red line and your day-to-day operations. You can always evaluate the true financial health of your company by using other methods while creating budgetary slack to keep yourself on track.
If you’re thinking of creating slack, you can always stick to a very conservative budget for expenses. As a small business owner, no one knows better than you that a penny saved is a penny earned. Set aside a certain amount each month for operating expenses, and try to come in under that number. You can also negotiate for more conservative terms with prospective suppliers, or you can look for ways to cut unnecessary extras.
Is slack profitable? The answer is that it depends. Having a safety net in your budget can come in quite handy while you’re expanding your business. Whether you’re building a new office or bidding on a new contract, slightly overestimating costs protects you against shortages and unforeseen expenses. A little slack in your budget could allow you to hire a new employee or upgrade your company equipment, making you more competitive in your field.
You never know when an added expense might pop up in the day-to-day life of your business. If you include a little slack in your budget, at the end of the year, you could treat your employees to a well-deserved bonus, pay down debt, or put smiles on everyone’s faces by throwing a nice holiday party with the surplus.
Would you like to lower the chances that your business runs out of money before it reaches sustainable profits? To do that, you need to build a cushion into your business’s budget.
What Is a Cushion?
A cushion is an allocation of money added to a budget that acts as a financial buffer for a variety of unforeseen circumstances. Delays in production, shipping, or operations, poor weather, a downturn in economic conditions, and changes in regulation are all things that can cause your business to spend a bit more money than you budgeted. If your business is still in the beginning stages, a financial cushion can help you easily get through these circumstances. A cushion in your budget is important for any business, but it’s perhaps more important for businesses just getting off the ground. Extra budgeted cash may help your business get through growing pains and take your company to the next level.
The challenge with building a cushion is that no two businesses or business owners are alike. This means there’s no clear-cut dollar amount for a cushion. Luckily, there are a few things you can analyze to help you arrive at a reasonable cushion number. First, review any financial projections you have made. Look at when you expect reasonable revenue to start coming in. Keep that date in mind. Next, look at all of your startup costs. Figure out how much all of your administrative, legal, advertising, supplies, and rent costs are for the year. Next, tally up your operational costs. How much is it going to cost you day-to-day to run your business aside from the costs mentioned above? Once you have these numbers written down, you need to decide how much of a cushion makes you feel comfortable. You may decide that one month’s worth of financial cushion is satisfactory, or you may feel that at least six months is needed.
As a small business owner, the amount of your budget cushion is ultimately up to you. Decide on a dollar amount that gives you enough time to turn your business around in case it encounters unforeseen circumstances. Always know exactly where your business stands. Make smarter business decisions now.