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’ budget.
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 burn through cash. If your business has not reached a certain level of profitability yet, a financial cushion can save you during these circumstances. A cushion in your budget is important for any business, but it is perhaps more important for businesses just getting off the ground. This extra budgeted cash could mean the difference between your business surviving another month or closing for good.
The challenge with building a cushion is that no two businesses or business owners are alike. This means that there is no clear-cut dollar amount that a cushion should be. 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, take a 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. Some business owners might only want one month’s worth of financial cushion, others may want six months or more.
As a small business owner, ultimately the amount of your budget cushion is up to you. Decide on a dollar amount that gives you enough time to turn your business around in case it encounters unforeseen negative circumstances.