You are in business to make money. So it’s important to plan to make money. That’s what a budget is all about: a plan to steer you toward a profitable future. Don’t think a budget is just for the bank manager. It’s a tool to help you manage and grow your business.
Like any tool, a budget is only useful if handled properly. Make a mistake with a knife and you could cut your finger off. Make a mistake with your budget and you could find yourself losing money or even losing your business.
We have listed here some of the most common (and dangerous) budgeting mistakes made by small business owners and given some tips on how to avoid making them yourself.
Overly optimistic projections
It’s great to have ambitious goals. But when it comes to budgeting it’s important not to get carried away by your enthusiasm. Make sure you carefully review your past sales and current market conditions. Prepare a SWOT analysis and consider any threats that may be looming.
As well as setting your expected budget, we strongly recommend you also set a conservative and optimistic budget to understand the financial impacts of unexpected growth or falling short.
Forgetting the little things
It’s amazing how small amounts here and there can add up to more than you expected. Be thorough in your budgeting. Take time to consider all of the costs associated with running your business and the possible new costs that may be incurred this year as a result of your plans. Otherwise hidden costs can add up to unexpected losses.
Forgetting about cash flow
Healthy sales don’t always add up to a healthy bank account. Simply projecting your sales and costs each month is not necessarily going to predict your bank account balance at the end of each month. Make sure you create a cash flow budget that takes realistic account of the time it takes for your customers to pay you. This is particularly important if your business is growing.
Don’t make the mistake of overestimating your earnings by forgetting to account for taxes. When considering your cash flows, remember that you will be expected to pay taxes on a monthly or quarterly basis.
Fear of estimates
Many small business owners are uncomfortable trying to “guess” what will happen in the future. They are afraid that the estimates they make for sales or costs may end up being wrong. Get comfortable with the fact that your estimates may well be wrong – and that’s ok. None of us has a crystal ball. The best you can do is to consider what has happened in the past, understand current market conditions and take account of your plans for the future – and then pick a number. As we recommended above you can (and should) look at conservative and optimistic alternatives so you can put in place contingency plans.
Putting it in a drawer
The biggest mistake most small business owners make is to put their budget in the drawer and forget about it. A budget needs to be a living document. Make sure you review how you are progressing toward your budget on a monthly (or at the very least quarterly) basis and revise the budget based on actual results. When your actual results don’t match up with your initial estimates take the time to figure out why.
For a review on how to go about setting your budget, take a look at our video.
Our accountants are delighted to provide advise and assistance in setting a budget, so if you want help don’t hesitate to contact us.