For some business owners, developing new customers, creating new products and services and doing deals can take precedence over carefully managing a budget. But growing your business and maintaining healthy cash flow is easier if you can at least avoid significant budgeting mistakes. The following five budget errors can crop up repeatedly if you let them.
1. Having overly optimistic revenue forecasts.
One common effort Vorobieff sees businesses make when managing a budget is failing to recognize that there will be a delay from when they have to invest resources to when they'll see the income boost that will, with luck, result.
“They'll budget for new salespeople or production people without taking into account the lag that occurs," Vorobieff says.
The solution here is to realize that it takes time for sales to be generated, and to adjust for that delay when making cash flow and revenue forecasts.
2. Failing to include all costs.
“Underestimating the time and cost of certain projects that need outside support is another big one," says Sonenshine, who advises organizations collaborating to address social, environmental and economic development challenges.
“One of the biggest mistakes is to budget new revenues, but not budget resources to make that a reality," Vorobieff adds.
That said, it's hard to know in advance what costs will be when a business is branching into a new market or introducing a new product, he concedes.
I've been working with an accountant to help me forecast both expenses and projected revenues better. I feel much more confident with my planning having someone helping me, but also recognize it's not a silver bullet.
—Joanne Sonenshine, founder and CEO, Connective Impact
One possible solution: Budgeting a contingency for additional expenses that haven't been foreseen.
“They always come in advance," Vorobieff says. “And they're always more. Until you get that first P&L, you don't know all the costs."
3. Failing to budget for variations in revenues and costs.
One of the more common budgeting mistakes is failing to account for predictable fluctuations, says Robert Morlot, managing partner of Tampa-based business consulting firm Clearwater Business Advisors.
“You take last year's budget, pump it up by 5 percent, divide by 12 and you have your monthly budgets," explains Morlot, who calls this the “peanut butter" approach to managing a budget. “You spread your costs for 12 months and you're done."
Peanut butter budgeting is a mistake, Morlot says, because almost all businesses experience periodic variations in revenues and expenses. Causes may include seasonality or customer order cycles, but they need to be accounted for carefully when managing a budget, he says.
“You have fixed costs that tend not to fluctuate. You have others that do," Morlot says. “Your budget has to reflect a monthly reality."
4. Failing to consider alternative scenarios.
Morlot urges business owners to craft a worst-case scenario when putting together a budget. Thinking about the loss of a major customer or other potential disaster may not be pleasant, but it's a key ingredient of a well-crafted budget, he says.
“Asking that question about what things could go wrong and what likelihood you assign to them gives you an opportunity to think about your business in a more strategic way," Morlot says. “Then if the worst case does happen, you've at least thought about it and have something in your back pocket you can pull out and use."
It's also advisable to consider scenarios that involve growing your business significantly more than the most likely forecast, Vorobieff says.
“With the optimistic ones, you're often adding costs," he notes.
5. Being too relaxed about budgeting.
This is a blanket failing that includes not exercising sufficient rigor when managing a budget as well as simply not getting around to budgeting at all.
To begin with, while accounting software can help generate a starting point for budgeting, the best use for technology may be setting an automatic calendar reminder to start the budgeting process, Vorobieff says.
“Unless it's on your calendar, it's going to get passed over," he warns.
Even if you do get started on time with your annual budget, Morlot says a common budgeting mistake is neglecting to take the process seriously.
“The execution of your business strategy means you better be a good budgeter," he says. “If you don't execute on your management processes, that'll doom you to failure. And one of those key processes is your budgeting processes."
One way to reduce the risk of committing these common budgeting mistakes is to seek advice from outside experts in business financial management. That's what Sonenshine is doing, while bearing in mind that it's still up to her to manage her business budget well.
“I've been working with an accountant to help me forecast both expenses and projected revenues better," Sonenshine says. “I feel much more confident with my planning having someone helping me, but also recognize it's not a silver bullet."
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