Critical Mistakes to Avoid when Budgeting for your Small Business

  • June 3, 2019
  • By Aidan Dwyer

Budgeting is one of the most tedious and boring tasks for few business owners that you do in the course of normal business operations. Despite how dull it seems, budgeting is one of the most vital functions to perform as a small business entrepreneur. It is important to define the business budget accurately and often. So that you can make adjustments accordingly. Here are some of the most common and critical mistakes that people make when creating a small business budget.

“Last Period’s Budget Will Work for this Period”

Whether you use a weekly, monthly, quarterly, or yearly budget for your small business, it must be constantly updated. As your business grows, so will your costs of operation. The budget that you made for one period may not necessarily work for the next period. One of the most common mistakes small business owners make is not adjusting their budget often enough. One recommendation that we make is to adjust your budget twice every budgeting period. Once in the middle of the period, and once at the end.

“Revenue is the Same Thing as Profit”

This is a critical mistake that can get you into a lot of trouble as a small business owner. Revenue and profit are two completely different things. Business revenue is the amount of money that your company is bringing in. Profit is the amount of money that remains after subtracting the expenses. The key difference between these two is that your business will bring in money every period. Due to costs like overhead and payroll, your business may not necessarily have profit every period. When your expenses are more than your revenue, it means your business incurring a loss over the budgeting period. Knowing your company’s revenue and profit; as well as the fundamental relationship between the two, are vital aspects of business budgeting for success.

Unrealistic Forecasting

Planning out your businesses budget always involves forecasting. Forecasting is the act of projecting the amount of revenue your business is going to bring in over a period. More than anything, one should do forecasting realistically. It is because this is important to plan an accurate budget. For example: If you project $400,000 in sales and you only bring in $300,000. This means you have many discrepancies in your budget. Adjusting for such large discrepancies means that you will generally have to pull funds from less crucial and flexible budgets. This is to make sure that one can pay fixed costs. Accurately forecasting your business revenues will save you time and money in the long run!

No Contingency Funding

Another mistake that business owners make when budgeting is not building a contingency fund into their budget. Contingency funding is essentially your business’s safety net. Occasionally, some expenses may come up that are out of the ordinary from your normal business operations. Building in contingency funding can help you stay on track when unexpected expenses come up. Also, if your business doesn’t have a contingency fund, you should strongly consider a Business Line of Credit. This enables your business to cover unexpected expenses and pay them back over time in weekly or monthly installments. This provides a buffer to your business budget. Which enables you to make more without dipping into other portions of the budget. Still, want to learn more about REIL Capital’s Line of Credit options? Click here to find out if a Line of Credit is right for your business.

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