When you own a small business, every dollar counts. Unfortunately, many business owners don't take this philosophy to heart, leading them to make various budgeting mistakes. While some mistakes are relatively small and can be easily corrected, others can have a devastating impact on a business. If you want to make sure you don't make budgeting mistakes with your business, listen to your CPA and work hard to not make the following budgeting mistakes that could hurt your bottom line.
Not Having a Budget at All
Believe it or not, some surveys have shown that nearly 50 percent of small businesses never create a budget. If you want to send your CPA into a tailspin and almost guarantee that your business will fail, don’t bother creating a budget. When you don't create a budget for your business, you will be juggling expenses as they come, meaning that, at any given time, you will have little grasp of how much you're spending versus how much you are earning. This mistake will also prevent you from developing a long-term financial plan for your business, giving you little chance of success over the long-term..
Budget and Business Strategy Not Aligned
When you create a budget, you need to make sure it is properly aligned with your business strategy. If it's not, you won't be able to keep track of your business goals, know if you are meeting your financial expectations, and where you should be spending your money, such as developing a website, buying new equipment or hiring more employees.
Not Managing Expenses
One of the biggest and potentially most devastating budgeting mistakes small business owners make regularly is not properly managing their expenses. When you talk to your CPA about this, you will find this is one of the primary reasons why many small businesses fail each year. When you don't properly manage your expenses, you may find yourself purchasing more inventory than you need, spending more than you need on marketing campaigns, or discovering that you don't have the money needed to meet your next payroll.
Not Budgeting for Taxes
Despite what many business owners wish for, Uncle Sam continues to come along each year with his hand out, requiring that taxes be paid. Unfortunately, if you have made the same mistake other small business owners have made and failed to budget the money needed to pay your taxes, you and your CPA will have quite a problematic situation to address and resolve. Therefore, always remember to budget appropriately for sales tax, employment tax, income tax, sales tax, property tax, and any other taxes you know will need to be paid. If you are unsure about this area of your budget, always ask your CPA for assistance.
Not Giving Yourself Any Wiggle Room
Even if you are meticulous about creating a budget for your small business, always remember that sudden and unexpected events can occur that could throw your budget into turmoil. After all, no one anticipated the COVID-19 pandemic to come along and wreak the havoc it did on small businesses. Whether it is something as serious as a pandemic or perhaps a piece of equipment that breaks down when you least expect it, always create a budget for your small business that gives you a certain amount of wiggle room with your money. If you don't, you may find yourself making drastic budget cuts in many areas, which could include laying off employees, reducing the hours you are open, or other things that could make operating your business much harder.
Not Keeping Up With Receivables
One of your budget categories will be sales income. You likely calculated this number based on sales from the same month in a prior year. However, if your current year’s receivables are not paid in a timely manner, your budget calculations will be very far off. You need to have a plan in place to keep up with receivables so that your income doesn’t fall behind. Experts recommend allowing no more than 30 days for clients to pay accounts in receivables.
Not Maintaining Margins
Prices have risen globally on nearly all kinds of merchandise and materials. If you have kept your selling prices the same, it’s likely that your margins are shrinking. You should focus on keeping profit margins the same, which may mean raising your price points, in order to keep up with the rising costs you’re incurring. Otherwise, your budget will ultimately fail because your expenses are overrunning your income.
Not Having a Backup Plan
When things do go awry, it’s essential to have a backup plan in place. This may be keeping a list of angel investors, growing a business savings account or keeping a look out for lower retail rents in other neighborhoods. Don’t wait until things go south to start trying to figure out how to dig your business out of the hole.
Not Updating Your Budget
Finally, once you do create the budget for your business, don't assume your work is finished. In fact, your CPA will tell you the work has only begun. A budget, while in some ways a blueprint or roadmap for your business, is also something that will need to be constantly updated and revised. Remember, your business budget will need to reflect where your business is at that particular moment. By meeting with your CPA regularly to review your budget, you can keep it updated so that you will have a much better idea of where your business is going financially.
While many small businesses close their doors each year, just as many, if not more, thrive and prosper. By relying on the advice of a CPA you know and trust, you will have few budget worries for your business.