Small businesses often skate by without a budget, or with one that’s oversimplified or inaccurate. Next thing you know, the company is in a cash crisis or out of business. To create a solid budget you can rely on for your business planning, avoid these common budgeting blunders.
- Setting unrealistic sales projections: Often small businesses pick a figure out of the air for future sales rather than reviewing past sales patterns and conducting market research into industry sales trends. They create fever charts that show sales will grow exponentially in an attempt to impress potential investors. But more often than not, these starry-eyed predictions don’t come true. Take a hard look at your past sales, market conditions, and any changes in your competitive landscape to create a realistic sales forecast.
- Underestimating costs: Don’t ignore the flip side of unrealistic forecasting. Make sure you track all upcoming expenses, monitoring for possible changes in the price of rent, materials, travel, labor, equipment, advertising, shipping, and any other key costs. Scrutinize every expense to see if there’s a way to accomplish what you want for less.
- Creating a budget, then ignoring it: A good budget is a living, ever changing document, not a ritual you go through once a year. If you throw together a quick budget and then toss it in a drawer, you’re not getting any value from the process. Each month, compare your real numbers with the ones in your budget. If you see a trend, income is rising faster than predicted or accounts receivable is taking longer to collect, adjust your budget for upcoming months to reflect reality. If costs are higher than expected, crack that box of receipts and figure out where the money is going.
- Ignoring cash flow: It doesn’t matter how many sales contracts you’re signing if no payment has been received and the bills are due. One of the key metrics to watch in any budget is cash flow. Are you having to pay for goods long before customers purchase them? If so, there’ll be a gap between when you pay and when you’ll get paid, and you’ll need to plan for how you’ll fill it.
- Making it too complicated: If your budget boggles you, it’s not helping you keep your business on track. If you feel like you’re drowning in data, pare the budget down to some basics, maybe just sales, earnings, accounts payable, and accounts receivable. Calculate your gross margin and cash flow from these and you’ve got some good basic indicators of how your business is doing.
- Ignoring taxes: Many companies like to figure their pretax earnings, but what really counts is what’s left in your pocket after you’ve paid your federal, state, and local taxes. Check last year’s return to know your tax rate, and be sure to add in all the types of taxes you owe when figuring your net profits.
- Rushing through the process: With the constant hustle of business life, it’s easy for the budgeting task to get pushed aside. The next thing you know, the ball’s about to hit the pavement in Times Square and you’re frantically throwing together a budget so you have something, anything, to look at for next year. Prevent this problem by integrating budget preparation time into your weekly schedule and starting far in advance of your deadline. Be sure to involve other managers, and gather data from every department before you call your budget complete.
Business reporter Carol Tice contributes to several national and regional business publications.