One of the most important things successful business owners do is to set up—and stick to—a budget. If this is an area that needs improvement in your business, pay attention to these five budgeting mistakes made frequently by small business owners. Forewarned is forearmed! It’s always better to learn from the mistakes of others than to make them yourself.
#1 – They fail to create a budget.
This is a very common mistake, but a simple budget can be indispensable, especially when cash flow is tight. At the risk of being too simplistic, you’ve got to know where your money’s coming from and where it’s going. Take the time to create a budget and then make sure you stick to it, or, at least, be aware when you deviate from it. Ironically, under-spending in a budget category can be just as big a mistake as over-spending. You can “starve” your business to death if you’re not spending enough on marketing and promotion, for instance.
#2 – They fail to save for emergency situations.
Most of the principles of a small business budget are the same as those of a household budget. There will be emergencies and unexpected expenditures, no matter how well prepared you are. Maybe your computer stops working. Perhaps the shopping cart software you were using no longer meets your needs and you have to switch to a different one. Whatever it is, it’s imperative that you have access to cash for handling emergencies. Most experts advise setting aside enough to cover three to six months of your company’s operations. The exact amount will depend on your industry. If you just sucked in a deep breath and thought, “There’s no way I can ever set aside that much,” just start wherever you are and build that emergency fund, even if it takes a long time.
#3 – They think revenue is the same thing as positive cash flow.
Just because you have money coming in, doesn’t mean you’re in the green and can just spend that money. Having a budget will remind you that even if your best client pays his invoice this month, you’ve got your annual insurance premiums or quarterly taxes due next month. Be prepared.
#4 – They forget about taxes.
Benjamin Franklin said, “In this world nothing can be said to be certain, except death and taxes,” yet time and again, small business owners will get caught short when that quarterly or annual tax bill has to be paid. Don’t let this be you! When creating your budget, include a category for taxes and be sure to set aside this money each month so it’s there the next time a payment is due.
#5 – They fail to automate or create financial systems.
Just as the rest of your business can benefit from system automation or procedures, so can your budget. In today’s age with so many technology advances, there are all sorts of applications and software available, including budgeting applications. See if you can find something that will meet your needs and help you automate as much as possible. QuickBooks is quite popular. I use AccountEdge Pro, but I’m taking a serious look at FreshBooks and have just started their 30-day free trial.
The last thing you want to do is have to borrow money to make ends meet, but that’s exactly what can happen if you make these budgeting mistakes in your business and don’t take the time to track your cash flow. Set up a budget and stick to it. It’s not only good for your business, but it’s also good for your peace of mind.