Budgeting mistakes within a business can create all manner of problems down the line. Whereas it can be a problem for individuals, the larger numbers involved with business operations means even small mistakes can become magnified in short order.
To prevent falling into the same trap with your small business, here are four of the worst mistakes to watch out for and actively avoid.
1. Being Underfunded
It’s always sensible to have more cash balances than are needed presently to handle rough waters that are encountered periodically.
Even if the company has not been great with money previously, you can still get a business loan with bad credit. A solid company with a business plan and a sought-after product or service is going to be one that’s worth lending to.
Don’t make the mistake of being underfunded because it’s a common cause of businesses going under.
Takeaway: Get spare cash in place to handle surprises before they happen.
2. Playing the Guessing Game
It’s often through being overly busy or simply lazy, but some people create forecasts that include expenses that are guesses or inaccurate estimates.
It might be that they guess, or they estimate that the costs will be identical to the previous year. Even if the expenses only rose by inflation, that can still be significant if the expense line is substantial.
Also, if expenses aren’t known ahead of time, look for publicly available budget suggestions for the industry you’re in or develop friendly business relationships where advice on budget numbers could be requested as a favour to plug the knowledge gap.
Takeaway: It’s necessary to itemise every expense across the board without exceptions. Only this way can the estimates, barring surprises, be realistic from the outset.
3. Failing to Account for Murphy’s Law
Murphy’s Law is an old saying that suggests things will go wrong and it’s just a matter of time. That’s life, essentially, in business too.
When budgets are tight and there’s no wriggle room anywhere, it’s a budgeting mistake. This also applies to the sales side where newer businesses often suffer from being overly optimistic about new sales levels and how soon money will flow in.
Takeaway: Allow for “miscellaneous” expenses that get allocated to their respective categories later. Underestimate sales to not get caught out should revenues fall woefully short. Set aside an extra percentage (10 percentage?) of the estimated expenses and work to make the numbers more accurate as time goes on.
4. Avoid Spending Too Much
Spending too much either on a special project or in the early days of the business are both mistakes relating to money flying out the door.
New Small Business
New businesses often are oversold by other companies keen to sell them every new desk, executive chair, and service available.
New companies must be fiscally sensible to reduce their cash burn until they reach profitability. Otherwise, they can run out of money before getting to that point. This isn’t immediately obvious at the start but is at the stage when the coffers are dry.
With special projects, it’s easy to let spending run away from you. Research the project well enough to create a budget for it. Avoid the budget expanding endlessly due to new information and/or an expansion of the original concept for the project. Set clear parameters and stick to them.
Takeaway: By spending too much, too early, companies shorten their potential lifespan and often put themselves out of business. Special projects can lead to new products or services in expanding markets. However, when poorly managed, they can waste scarce resources on a complete farce. Manage them wisely from the start.
Avoiding small business budgeting mistakes reduces the chances of a business failing due to financial mismanagement. At least, that’s one less thing to worry about.