No one would disagree that budgeting is an inexact science. And, unfortunately, it’s a process with a fair number of pitfalls. Add to that, it’s a process that many business owners find painstaking and tedious.
But the fact remains: Budgeting is a must. You just can’t run a successful business without a budget! With a proper budget, small business owners can effectively monitor and control the finances for their business.
There are ways to make it a little less painful, however. One of the best: Learn from the experts on how to avoid some of the most common budgeting pitfalls.
Let’s start gradually. On entrepreneur.com, contributor and CFO Mike Sowinski outlined how to avoid you common budget pitfalls. When you’re budgeting for the coming year, first take stock of where your business is right now, as well as where you started last January 1 and the road you traveled to get to the present. Sowinski says one common issue among business owners is not looking at everything, which can only be done by analyzing your business’s balance sheet, including everything your company owns and owes. Instead, some business owners tend to look at the P&L, which may look great but only tells part of the story—revenue and expenses.
He offers three important areas where you could be seeing this kind of disconnect, along with ways to remedy them: Accounts receivable; accounts payable; and fixed assets. Your assumptions about how each of these areas is fluctuating and contributing to your cash flow and bottom line could be inaccurate. As you’re building your budget for next year, look at these first, make the operational adjustments if necessary and factor them into your budgeting process. The payoff? Being able to stay closer to your budget throughout the year and have the necessary cash on hand when you need it most.
What businesses are most likely to make budgeting mistakes—and why? According to dnbsmallbusiness.au (Yes, it’s Australia, but budgeting errors are universal!), all businesses, large and small, can fall prey to budgeting pitfalls. And it can happen for all kinds of reasons, including if the budget is unrealistic, or too simple or complex, or if no one pays much attention to it throughout the year, which is apparently very common!
But there are concrete ways to avoid such pitfalls, all very doable by applying some thought and discipline to your budgeting process. These include:
- Not overestimating your revenue and underestimating your costs. To be safe, reverse these.
- Putting plenty of detail in your budget.
- Not downplaying or ignoring cash flow. It’s central to the health and viability of your business.
- Not forgetting to include your tax expenses.
- Not being put off by differences. There will always be differences between budgeted vs. actual results. Use these as learning tools for your next budgeting go-round.
- Treating your budget as a working document. Revisit (and revise, if necessary) it often throughout the year.
Other business experts reiterate some of the tips above and offer several more, besides:
- Don’t confuse an optimistic outlook with being unrealistic.
- Be sure to involve key people in key areas, e.g., sales and production.
- Budget for seasonal fluctuations, if applicable, as well as for contingencies.
- Don’t equate sales with cash flow.
- Don’t put your budget in a drawer!
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