Whether you’re just starting out or you already have an established business, you’re probably still making these 5 common budgeting mistakes. The all-too-common method of budgeting involves waiting until the end of the year, quickly scraping together a budget with optimistic projections and ungrounded statements, and then immediately forgetting about it again once it’s done.
If you take the time and effort to avoid these 5 mistakes and actually craft a strong budget, you’ll be amazed at just how much of a difference that can make for your company!
One of the most glaring problems in most budgets is the presence of totally unrealistic projections which are not really based in historical trends or meaningful analysis of what you can expect in the coming year. It’s easy to fall into the temptation of overstating just to entice investors but it’s much better to under-promise and over-deliver.
If your projections aren’t based on real data and analysis, you’re not helping anyone. An honest budget is more useful than an optimistic budget that doesn’t hold any water. This is an especially common problem among small businesses and startups who are still scrambling to get investors. Keep in mind, though, that it is better to have a slower and steadier start that gives you time to build a strong foundation than it is to rise up quickly and then fall when you realize you can’t meet the expectations you promised you would.
Lack of a Clear Strategy
Your budget is not just an itemized list of incomes and expenditures. It’s a plan, a set of goals. It’s your business strategy quantified into financial figures. Create it to fulfill that role and utilize it as such. You must be meticulous in its creation, using all the data you have available to create a realistic and actionable budget that has a clear method of implementation for the coming year.
Then, once you’ve got it, you have to stick with it and regularly adapt it to reflect any changes. You can make this whole process a lot easier by taking advantage of the right tools. Well-designed budgeting software can make the whole process a lot less gruesome and tedious.
It’s hard to stay organized when you’ve got hundreds or thousands of files in different places that don’t seamlessly blend and make it easy for you to analyze the data they contain. With the right software, however, keeping track of all this data becomes much easier and creating a well-informed, realistic, and effective budget suddenly becomes much more simplified and intuitive.
Failing to Monitor Progress
Creating a budget is not the end of the process. You’ve got to actually use it and work with it. Don’t treat it like a dry, fixed summary of what you should be doing. Treat it as a living piece of your company that must adapt and evolve to the actual circumstances just as any other piece of your company needs to do.
To do this, revisit your budget on a quarterly basis at least. If you can manage it, try to revisit it monthly. Check to see if you are on track to meet your goals. See which areas are doing better than expected and which are progressing more slowly than you predicted. Tweak the details to better deal with the actual circumstances.
This one sounds like a seeming impossibility at first: you have to be prepared for the unexpected. This doesn’t mean you have to spend every waking hour trying to predict every possible obstacle or problem that could arise. It just means you need to leave enough wiggle room in your budget. Don’t budget out every last penny. Set something aside to handle any unexpected contingencies that arise.
Unexpected problems will happen and if you lack the resources to deal with them, what would be a minor inconvenience could turn into a severe blow that knocks your company off balance. The simple addition of a contingency budget can give you the security and peace of mind that you need to go forward. If you don’t end up using it, then you’ve got free cash at the end of the year to pad your budget for the coming year.
Lack of Communication
Unless your company is a one-person operation, you are not the only one who should be involved in the budget planning process. You need to involve all the key people and have an open dialogue about what each person’s expectations are for the coming year.
If you try to create the budget entirely by yourself or leave it wholly in the hands of your CFO, it will lack important input from the key people who will, ultimately, be responsible for realizing that budget over the coming 12 months.
Turn budget planning into a collaborative process in which each key actor provides relevant data and information as well as contributes to the creation of the actionable steps that will be taken to make those budgetary projections a reality.