Your business budgeting is often the difference between getting what you want and failing.
Budgeting is an essential life skill. Failing to manage your money well could lead to unnecessary stress and anxiety. In business, budgeting is just as important – perhaps even more so.
With the stakes being much higher, the consequences of poor budgeting could lead to bankruptcy, a tarnished reputation and even financial difficulties for your employees and their families.
No entrepreneur wants a failed business resting on their conscience.
To help your business succeed in creating an effective budget, here are the top five business budgeting mistakes to avoid.
1. Low Cash Reserves
One of the fundamental principles of personal finance is the emergency fund. Everyone can see the wisdom in saving 3-6 months of living expenses to handle life’s unexpected, little knocks. But very few people have a rainy-day fund.
Businesses can be just as guilty of neglecting to prepare for misfortunes by not holding enough cash or easily liquefiable assets.
No matter how swimmingly your business is going, always prepare for the worst.
Sudden spikes in operating or manufacturing costs, product recalls, or issues with the distribution of your product or service could push you into the red without adequate cash reserves.
New startups, in particular, have to be ready to stand a sudden financial emergency. Business inexperience could result in many unforeseen challenges in the beginning.
If you’re just starting out, give your business the best possible chance of success by doing thorough due diligence. Build as big a runway as possible and meet with potential investors way before you ever need the finances.
2. Trying To Be Too Perfect
Budgeting is not an exact science. The more you try to nail everything down to nickels and dimes, the more you can be assured that your master plan will go awry.
Marketplaces are a dynamic beast. Even well-established, stable businesses can have months with wildly unexpected revenue (both good and bad) or costs that suddenly spike.
It may drive the perfectionist in you nuts, but budgets are never going to be spot-on and must remain flexible. Just like the marketplace, they should be viewed as constantly evolving. They have to be continually checked and updated as changes come into play.
If you’re feeling overwhelmed trying to hit a moving target and tracking numerous financial metrics, take a step back. Concentrate on the key metrics that matter: revenue, cash flow, costs. If you’ve got a healthy margin between these, then you can relax a little.
A simpler approach may be what’s required to ensure your business is financially healthy, while helping you remain sane.
3. Playing Too Defensively
Your appetite for risk has a major influence on the growth and income potential of your venture.
Although budgeting is essential, concentrating solely on penny-pinching will restrict your company’s growth prospects. You’ve also got to allocate funds to marketing, research and development, launching new products or investing in other ventures or markets if your company is to reach its full potential.
“Don’t play not to lose, play to win.”
Small businesses are especially guilty of being too tightfisted and overly cautious. But growing from a one-man-band to a sizeable enterprise hinges on taking advantage of the opportunities that arise.
But of course, be sensible in your expansion plans:
- Be certain over how much you can invest
- Pay attention to your KPIs
- Understand market conditions and be confident that it’s the right time for your growth plan
- Prepare a forecast for the year and ensure cash flow will remain strong
4. Unrealistic Forecasting
Not accurately forecasting your financial metrics or fudging your numbers to portray a more optimistic immediate future could lead to financial meltdown. If you over-inflate cashflow projections to bring investors on board, just remember, your investors are expecting you to live up to those promises.
Realistic projections that show slower growth might mean you’re holding out longer for that initial seed money, but at least you’re going to be able to deliver.
Over promising and under delivering has seen industry giants like Enron fail in spectacular fashion. Learn the lessons without making the mistakes yourself.
If anything, it pays to be somewhat pessimistic in your estimates. Then wow investors with over-delivering. They’ll then be brimming with confidence in your ability to manage their capital and grow a business, and they’ll be all too willing to further back your venture.
5. Not Controlling Costs
Monitoring expenditure is a vital part of budgeting. Without paying attention to costs, they can quickly escalate.
So, set aside time to review your fixed and variable business expenses regularly. Scrutinize all your costs and seek ways of getting the same result for cheaper. Cost-cutting isn’t being miserly; it’s running an efficient operation.
No matter the size of your enterprise, running a lean operation is smart. It allows you to remain profitable in a down market and build capital to fund your growth. A healthy balance sheet is appealing to investors if you ever need to raise funds.
Give Business Budgeting The Time It Deserves
Getting the financial backing to launch your idea is a tough job, but it is only the beginning. Remaining in the game long-term requires ongoing budgeting and money management skills.
Entrepreneurs that treat budgeting with the same precedence as their growth strategies are the ones that ultimately do well.
Budgeting may not be the glamorous part of running a business, but it’s vital if you want to remain in business.