For most businesses, money is not an unlimited resource and thus, must be managed. Particularly for small businesses, having an accurate budget is critical for success. Unfortunately, business operations can be volatile for small businesses, making accurate budgeting tricky.
Here are 3 of the most common budgeting mistakes that small businesses make so you know what to avoid.
1. Under Budgeting
Under-budgeting is when a business does not allocate enough funds to cover its necessary expenses. This is often caused by budgeting methods that are overly simplistic that do not consider the full scope of a business’s operations.
Under-budgeting leads to cash flow problems. Imagine a small bakery that projects it needs $500 to cover the cost of operations each month. But after accounting for overhead costs, taxes, and other fees, they realize they need closer to $900. This means that the business must either make cuts elsewhere or find a way to come up with more revenue in order to be successful.
2. Over Budgeting
Over-budgeting is when a business allocates more funds than it needs, resulting in extra expenses that are not necessary. This is often the result of a lack of knowledge about how much money the business actually needs or an overestimation of how much money certain expenses will cost.
Over-budgeting may lead to a business spending more money than it needs and leaving fewer resources for growth opportunities. For instance, a small restaurant might estimate that they need $3,000 to cover the cost of food and supplies each month. But in reality, they only need $1,500 because of discounts unaccounted for. This means that the business is spending an unnecessary $1,500 each month, leaving fewer funds for other expenses or investments.
3. Not Automating the Budgeting Process
Not automating the budgeting process is when a business does not use software or other tools to make tracking and creating accurate budgets easier. This is often likely because of a lack of knowledge about available tools or an underestimation of how much time manual budgeting takes.
The consequences of not automating the budgeting process include not just inaccurate budget but also missed insight. Imagine a small retail business not using any type of business budgeting software, leading to lengthy manual processes, inefficient budgeting, and inaccurate projections. This business is at risk of missing out on potential opportunities and wasting time on unnecessary tasks.
Budgeting mistakes can be costly for small businesses, with consequences ranging from cash flow issues to a lack of resources for necessary expenses. It’s important for small businesses to recognize common budgeting mistakes such as under-budgeting and over-budgeting to curtail the misallocation of funds. Plus, businesses that automate the budgeting process with software or other tools reap the benefits of saved time and accurate financial projections.