Mistakes to Avoid when Budgeting for your Small Business

  • July 31, 2019
  • By Aidan Dwyer

Budgeting can be a tedious and boring task you do in the course of normal business operations. Despite how dull it might seem, budgeting is one of the most vital functions you can perform as a small business entrepreneur. It is important that your business budget is done accurately and often so that you can make adjustments accordingly. Below we have included some of the most common and critical mistakes people make when creating a small business budget. 

  1.  “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 enough. We recommend all business owners adjust their budget twice every budgeting period; once in the middle of the period, and once at the end. 

  1.  “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, while profit is the amount of money left over after your expenses are subtracted. The key difference between these two is that your business will bring in money every period, due to costs like overhead and payroll, yet your business may not have profit every period. When your expenses are higher than your revenue, your business is 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.

  1.   Unrealistic Forecasting

Planning out your business’s budget always involves forecasting. Forecasting is the act of projecting the amount of revenue your business is going to bring in over the given period. More than anything, forecasting needs to be done realistically in order to plan an accurate budget. For example: if you project $400,000 in sales and you only bring in $300,000, you are going to have many discrepancies in your budget. Having to adjust for large discrepancies means you will have to pull funds from less crucial and flexible budgets. This assures that all your fixed costs are paid but it typically leads to more loss of profit. Accurately forecasting your business revenues will save you time and money in the long run!

  1.  Lack of a Contingency Fund 

Another mistake that business owners make is not building a contingency fund into their budget. Contingency funding is essentially your business’s safety net. Occasionally, some expenses come up that are out of the ordinary from your normal business operations. Building a contingency fund can help you stay on track when unexpected expenses come up.

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 in weekly or monthly installments. This provides a buffer to your business budget, enabling you to make more without dipping into other portions of the budget.

REIL Opportunities 

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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