6 Common Business Budgeting Mistakes to Avoid
No one wants to be told how to spend their money, but not so with business money. Without a definitive plan on how to spend your business money by creating a budget, your business is well on its way to financial ruin.
However, knowing the importance and process of creating a business budget is not enough. There are some common mistakes you must avoid when creating this budget to get maximum rewards and move your business finances forward.
In this article, we will examine six budgeting mistakes to avoid, as well as the do’s and don’ts of business budgeting.
6 Business Budgeting Mistakes to Avoid in Your Business
Budgeting mistakes can have adverse effects on your overall business finances. So, you need to be thorough when creating your business budget to leave no stone unturned.
Here are 6 business budgeting you should avoid and what to do instead.
1. Overestimating revenue
Overestimating how much revenue your business will generate is the first mistake to avoid. While you can forecast sales based on past sales performance, other factors can affect your projected revenue such as market demand, season, competition, etc. which will make your forecast inaccurate.
To avoid this mistake, consider other factors that can affect your projected revenue when estimating your revenue to create a solid and near-accurate projection of business revenue. This will eliminate the mistake of overestimating revenue and will ensure that you can cover all business expenses in whatever season you find yourself in. It will also help you set realistic sales goals.
2. Underestimating Costs
Just the way overestimating business revenue will affect your business, underestimating business costs has as many consequences. Your costs refer to the amount needed to run your business, or expenses incurred in the course of business operations, such as money for rent, raw materials, salaries, marketing, utility bills, equipment repair, etc.
Now, with inflation and the constant rise in prices, setting a business budget based on old prices without some amount set apart in case there is a price increase is what leads to underestimating costs.
For example, if a baker purchases a bag of sugar for #5,000 last month, and allocates that same amount to buy sugar when creating their business budget this month, they may be underestimating their costs, if the price of sugar has increased to #5,500 per bag. This will affect the entire budget especially when there is no allocation for unexpected expenses, leading us to the next budgeting mistake to avoid.
So, always be up to date on the current prices of things, when creating your budget. Also, allocate some amount for unexpected expenses to help, in the case of an increase in the costs of production.
Related: 7 loan application mistakes small business owners must avoid
3. Not budgeting for unplanned expenses
Unplanned expenses are one of the leading reasons for businesses that break their budget.
With the possibility of equipment breakdown, increase in rent, and other unexpected expenses, every business must be prepared by creating an emergency fund to cater to those needs.
This is also important because, in situations when there is no allocation for unexpected expenses, one may need to borrow or halt business operations.
To handle this, allocate 5% of your monthly revenue to the unexpected expenses category. Even if the fund remains unused, it will serve as a source of savings for the business in the long run.
4. Not tracking small expenses
Ignoring those small, negligible expenses is another fatal mistake to avoid. Because as little as the #200 you remove almost every day to buy data to post on your business page, it can add up to a lot and affect your budget if it is not tracked and budgeted for.
The rule of thumb is that no expense is too small to be included in your budget. Budget as little as the airtime you buy for business dealings, to ensure that every naira is accounted for.
Must read: 7 Pricing mistakes small business owners make and how to fix them
5. Not budgeting for taxes and debt repayment
Not creating an expense category for taxes and debt repayment is another mistake to avoid. In every business budget, allocate a category for your tax payment, and if you have a business debt to service, remove a specific amount from your monthly revenue for that purpose, till you finish paying up.
This will save you stress in so many ways. First, it helps you avoid running helper-skelter when you need to pay taxes or when the date for debt repayment is drawing near. It also makes debt repayment easier, as opposed to when you want to pay at once from a month’s revenue.
6. Ignoring cash flow
Cash flow management involves tracking how much goes in and out of your business. If this is ignored, your budget may just be a decorative document made for the sake of it. So, ignoring it is a big mistake.
After creating a business budget, begin to track how money comes into your business, and how it goes out. This helps you to account for every amount that comes into the business, identify the unnecessary purchases you are making, curb impulsive spending, and more.
Do’s of Business Budgeting
Here are some do’s of business budgeting to ensure you are tying things down on all sides to make your budget work:
- Prioritize debt repayment
2. Set financial goals to guide better budgeting
3. Be flexible and allow necessary adjustments when needed
4. Follow through with the budget you created
5. Use budgeting templates or tools for easy tracking
6. Consult an expert for help when confused
Related: 4 Financial Numbers to analyze for business growth
Don’ts of Business Budgeting
Avoid the following when creating a business budget:
- Don’t complicate the budget
2. Don’t overlook taxes
3. Don’t neglect past financial data
4. Don’t neglect setting money aside for business growth
5. Don’t use just any budgeting technique, find out what works for your kind of business.
Reaping maximum rewards from budgeting with less effort
The rewards that come with business budgeting far outweigh the stress of creating one. However, there are certain pitfalls as have been discussed above that you must avoid to reap maximum benefits from budgeting.
While it may seem like some of the mistakes above are obvious, you will be surprised at the number of business owners who don’t pay attention to them, and end up with difficulties in their business finances. But that will not be you – since you are now informed.
Need a more detailed guide on business budgeting? Get our budgeting ebook where we go more in-depth on all you need to know to do business budgeting right, more mistakes to avoid, the best budgeting technique for your business, how to budget in financially difficult times, and much more. Get a copy here.
