Top 7 Budgeting Mistakes

If you are like me, you love budgeting: the number crunch, trying to predict the future, and all the planning! But more likely - you'd rather have hiccups for the rest of your life than work through a budget.  Let's face it, budgeting can be a daunting, overwhelming, and sometimes heartbreaking task. Now what's worse?  You go through the exercise of developing a budget for your business, but make one or several costly mistakes. Below is a list of the top 7 budgeting mistakes business owners make.  Avoiding these budgeting blunders will help keep your business on the right track.

1.    What budget?
The number one mistake small business owners make is NOT HAVING a budget!  That's right.  I was surprised to find that many business don't actually have a budget.  So if you have a budget, congrats. You are already heading in the right direction! 

2.    Creating a budget without linking it to your long-term financial goals
Is your 5 year goal to expand into a new market, to sell your company, or to purchase that $100,000 widget maker?  Whatever your long-term goals, your current budget needs to be structured in a way that will help you inch closer towards these goals.  If you are budgeting just to "predict what will happen next year" - you're doing it wrong.

3.    Setting unrealistic, aggressive targets
As entrepreneurs, we are naturally optimistic. In setting revenue targets, we can't just budget for what we'd like to happen. We need to 1) look to the past to get an idea of how our numbers have trended, 2) consider how the trend needs to change to reach our longer-term goals (see #2 above), and 3) consider outside factors or changes that your business will make that will impact future sales. If you are going to increase sales by 10%, there should be a rational explanation and plan for how you expect this to materialize.  Nothing is more disheartening than getting half-way through the year and realizing that you are nowhere close to meeting your budget.

4.    Assuming that high revenue and low expense budgets indicate high cash flows
Just because we are budgeting profits to be up 10%, doesn't mean that we should also expect cash flows to be up 10%.  When we budget, we are typically looking at the P&L (profit and loss or the income statement). You should make considerations for "non-P&L" type items such as major purchases, investments, debt re-payments, etc.  It may even  be a good idea to do a cash-flow budget - especially if you have experienced cash flow issues in the past.

5.    No cushion for emergencies
It is inevitable.  You will forget that one large insurance bill that comes once a year or the credit card processing fees you are charged monthly.  You will have an unexpected legal matter rear its ugly head. There should be some wiggle room in your budget for these surprises.  Trust me on this.  You will thank me later.

6.    Forgetting about Uncle Sam
You've heard the saying: "Only two things in life are certain: Death and Taxes."  Many budgets are made without taking into consideration the state and federal taxes that you will need to pay.  This is a major expense for most and forgetting to budget for this is a costly mistake.

7.    Creating the budget, but not actively monitoring costs against it
So you've created the budget and have not made any of the above mistakes - good! Although this is the last item on my list - it is one of the most important. If you have a budget, but don't compare your actual revenues and expenses to it each month (or quarterly at the VERY least), you would have made you budget in vein.  Harsh, but true. Monitoring against the budget is the whole point of creating the budget.


Please visit my website at www.mytrustedcfo.com to learn more about me and what I do.  Thank you!
-Bonnie Forssell, CPA