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Budget planning and implementation significantly impact the course a business will take. For small businesses, the budget determines whether the company will expand or close down. Business expenses need to be kept in check so that they do not surpass income; without a budget, cash deficits can quickly accumulate through over-spending.
Consider a budget as a critical tool that assists with business operations. Typically, a budget is created and reviewed annually. Following are five common pitfalls to avoid when developing your company’s budget:
1. Making an unrealistic budget
Small businesses typically maintain spending restrictions. Although it is important for small companies to guard against overspending, one budget creation pitfall is that of creating an unrealistic budget. Business owners may unintentionally create a budget that is simply too tight, which may lead to hampering everyday operations. This results in constant budget revisions for unplanned expenses.
Conversely, it is equally easy to overspend and create an inflated budget which does not coincide with profitability goals. Attempt to create as realistic a budget as possible.
2. Not outlining your objectives clearly; confusion between what is needed and wanted
Following your business plan is vital to developing a budget that fulfills all your business needs. Disregarding the groundwork that is laid out in the business plan leads to creating an unrealistic budget. If for some reason you have not yet developed a business plan, begin by outlining business objectives and allocating specific dollar amounts to each objective as you build your budget. Be sure to allocate but also to monitor these funds, as simply allocating funds to potential activities can lead to miscalculations and overspending, which results in financial problems.
Remember to include and account for items such as profit-sharing expenses, staff bonuses, and maintaining a good credit history when outlining your objectives.
3. Not leaving room for the sudden and unexpected requirements
Ideally, budgets are created based on a business plan. However, this may not account for any unexpected needs. Plan and budget for unexpected expenses to avoid having to draw funds away from other important budget categories, resulting in a needless financial hassle. Instead, plan for the unexpected, and set aside funds for these unplanned situations. When creating a budget, keep in mind market price fluctuations that may impact your expenses.
4. Depending on future earnings
How often do we make the mistake of assuming that a future income will pay for a certain current expense? While this thinking is not entirely wrong, it is all about achieving the right balance. Instead of allocating significant funds that are dependent on future earnings, consider holding off on incurring the expense. You can then allocate this expense to the next billing cycle. If the expense cannot be deferred, evaluate vendors who offer something more affordable. If necessary, invest time researching more affordable suppliers who will agree to your payment terms.
5. Insisting on precision
While matching expenses to income is central to a budget, how much precision can you achieve without wasting additional time and money? Trying too hard to include everything inside a single budget can lead to frustrations and wasted time. Furthermore, a precise budget unintentionally may not allow for unexpected expenses.
Attempt avoiding these pitfalls to make the budget process as smooth and as effective as possible. You can check out our Budgeting Tools for Small Business for effective budgeting.
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