Small business owners usually carry the burden of accountancy on their shoulders to save some amount for the growth and development of the company. Although, this practice is not recommended as there is a great deal of difference in the accuracy of financial statements when managed by an accounting professional.
But, if you are a small business owner and have decided to do the annual budgeting by yourself, you must keep a few points in mind. Over the last few months, we have worked closely on small business budgeting issues and prepared a list of the most common small business budgeting errors one should avoid.
Budgeting is the backbone of any business’s operations and sales, especially for emerging companies. We understand that the budget is an approximation. But, if there is a wide variation between the budget and actual expenses. The business will have to resort to loans and other credit notes, which will cost the business fortune.
The budgeting errors might seem insignificant to some extent. In some cases, these insignificant-looking errors have led to the failure of the entire business machinery and caused irrecoverable losses to the business owners. These losses ultimately lead to business failure and the shutting down of the firm.
It is highly recommended that the business owner stay mindful of all the challenges in the given financial year. The business budget should be revised in multiple iterations, and all the dynamic factors should also be considered. Let’s discuss the most common small business budgeting mistakes so you can check your business budget is free from these mistakes.
Tables of Contents:
Common Small Business Budgeting Errors to Avoid
1. Missing out on tax obligations
Your financial statements may look reasonable, but make sure you have enough money for taxes due towards the state, local, and federal government bodies (such as sales, VAT, and payroll taxes). Never club this money with “money in the bank”. Never ever miss this component such that you don’t have money to pay later for fulfilling your tax liabilities.
2. Underestimating costs
All businesses have incidental expenses that, for one reason or another, don’t always fit into the budget. A valid example is buying a new device or software. You may have factored the cost of your equipment into your budget, but you may not have thought about budgeting for the resources and expenses required to train your staff and maintain your equipment.
3. Overanticpating Sales and Revenue
Some business owners calculate the current year’s sales by looking at the last year’s performance and giving it a “reasonable” growth rate. If you want to set realistic goals that aren’t consistently under or over-achieved, you need to look beyond your performance over the past year.
Variables such as market size, dynamic factors, competition, and expansion into new territories should be considered. In many cases, the sales might be constant, or there could even be a decrease in sales. Therefore, one must consider all three possibilities while preparing the budget.
4. Not leaving a window for adjusting the budget
You must always keep updating your business budget according to the circumstances you encounter throughout the year while working on any project. You can revise the budget based on the current scenario of the business.
While preparing the budget, you must leave some window for adjusting the dynamics based on the business’s actual performance. This can be done with the help of variables and considering both positive and negative scenarios.
5. Not monitoring the business performance
It is easy to make a business budget, but the real challenge is to review the company’s performance in accordance with this budget. Most business owners forget to review the business budget and monitor the business performance. This is a critical act of negligence, as you may face a nasty surprise.
Reviews allow us to take corrective action on time. For example, if your product sells poorly, you investigate its reason and ask the team to fix it.
Some simple steps that you can take for managing your budget are:
- Selecting the Right Accounting System
- Connecting to your Financial Institution
- Tracking all your expenses
- Recording all your expenses in an Expense Management App
Summing Up
After discussing the most common small business budgeting errors, we assure you that you will stay mindful of these mistakes and always guide others to be careful of these. As budgeting forms the basis of all the financial activities planned for the year, it is recommended that you be really attentive and mindful while preparing the budget.
If you don’t feel confident and need professional assistance, you can always take advice from an accounting consultant. You should make sure that there are multiple review iterations for the budget before it is released so that any vital expense is not missed. If you make efforts while preparing the budget, it is quite probable that you won’t face any critical financial challenges during the year.
