3 Ways to Avoid Budget Flops
Don’t let your Budget turn into a Fiasco
Fix it Quick!
The fact is sometimes (no matter how hard we try) budgets turn against us, they become unhelpful burdens;
– we spent hours getting a budget together, only to then have them fail us!
Commonly, they flop because of a few structural faults or issue easily fixed once you know how, but in the meantime they can cause huge road blocks, so we give up in despair!
It isn’t just one variance causing the problem – it is a plethora of omissions, under estimating, onerous tracking etc that all contribute to us abandoning the process! If a budget is not solid to begin with, then it will always fail to achieve any of the fabulous benefits listed below.
allocate appropriate resources to projects
identify problems before they occur – e.g. income shortages
plan for the future
increase staff motivation[/twocol_one_last]
There are about twenty posts on this blog related to the ‘budgeting’ subject covering various aspects including:
But none on what to do when the whole thing becomes a mess and you are tearing your hair out. So, here goes, what to do if the budget you worked so hard to set-up turns out to be a catastrophe, and how to avoid budget flops in the future!
3 Solutions for Failing Budgets
Often our first budget draft is extra detailed; this is good in one sense because it ensures all of the possible expenses are included, but tracking so much detail will become a nightmare – so much so that often people give up! You should be able to maintain a budget with a reasonable amount of record-keeping, if it is too onerous you will of course begin to hate it!
SOLUTION: There are two easy fixes:
a) Use Categories – instead of allocating every expense to a separate line for tracking group things together.
e.g. Use ‘Utilities’ to combine all your monthly Telephone, Electricity, Water, Rates etc; ‘Insurances’ can include all sorts of coverage; and ‘Advisers’ can cover your Bookkeeping, Accounting, Legals. Most importantly use groups that make sense to you and that you will easily remember for tracking –
Remember make the most important information the most obvious and group up the less important expenses.
b) Be Flexible – This is your SME, your Budget, and your Decisions – don’t worry if you get it a bit wrong or have to shuffle and adjust. Shuffling and adjusting is pretty much what you spend the whole rest of you day doing to optimise your business, feel free to do the same with your budget – no-one is going to get cross with you for not getting it exactly perfect.
Remember your budget is a decision-making tool – even if it is 10% wrong, it is still 90% more help than having nothing at all in place!
Budgeting is usually for Income and Expenses (the ‘Ins’ and ‘Outs’ of your business) – only covering items that appear on your Profit and Loss Report. However, you also need to budget for investments, savings, expansion, loans etc, – in short you also need to plan for changes to your Balance Sheet – increasing your assets and repaying loans (the ‘Owns’ and ‘Owes’ of your business). This is especially true if you budget to a zero balance, allocating to spend everything that you earn on running the business instead of investing in the business – what happens when the shop starts to look tired and needs a refit?
SOLUTION: Reverse your thinking, start with what you need to put aside to increasing your assets and repay loans, then allocate the rest to running the business on a day-to-day basis. You can still use the same budget, just add in some extra lines that enable you to apportion some of your income to your business value as well as your business operations.
Extra Expenses, on top of your budget fall into three categories:
You plan for typical ongoing monthly expenses: rent, phone etc. But whoops, you forget about yearly expenses, like insurances, registrations, rates and taxes.
SOLUTION: These expenses are easy to include by simply doing some digging:
- Go though your filing, or check your accounts and find what you paid last year
- add an extra 5% to that figure to cover any price rises to calculate this year’s amount
- divide your new yearly amount by 12 so you get a monthly amount
- allocate the monthly proportion for expenses every month so you have enough when these less frequent amounts pop-up.
Often we don’t set aside money for unforeseen expenses, repairs and maintenance, replacements, relocation costs, a new fit-out, a price rise in supplies, or even worse an emergency arises etc. Budgeting by assuming that nothing unexpected will crop up means when something irregular does happen budget chaos ensues. But are these so-called irregular costs really unexpected? Almost everything eventually need repairs or replacement. The amount of repairs depends on age, quality of construction and maintenance.
SOLUTION: Financial planners recommend building up two or three months’ worth of emergency funds. Start by budgeting to put money aside for when these arise, the least stressful way is to assume it will take two years to accumulate a pot of three months running costs.
- Go to your most recent set of Year End Accounts and locate your Total Expenses for last year (you need to make sure you catch EVERY expense)
- Add an extra 5% to that figure to cover any price rises
- Divide your new yearly amount by 3 so you get a Total Target to put aside for the Unexpected
- Divide your Total Target amount by 24 so you get a monthly amount to put aside for the Unexpected for the next two years to reach your goal (or divide by 36 if you want to save up over three years instead of two)
- Allocate the monthly proportion to a separate savings account (do a direct debit transfer)and make sure it gets high interest
Inflation affects most of us as our expenses creep up, but it isn’t like our providers and suppliers all increase their prices a tiny amount each month to assist with smooth budgeting – usually price hikes leapfrog and pounce catching us short in our budget
SOLUTION:We inflate each budget category by 10% more than we normally spent in a typical month.[/twocol_one_last]
e.g. as our utilities spending in an average month was $400, our budget shows $440 in that category. That way, when prices change or we make some extra interstate telephone calls, we aren’t over our budgeted amount.
One of the best things about this is we often have “leftover” money to apply toward whatever our most pressing financial goals are – usually our latest marketing or advertising plan.
There is quite a lot of what Accountants would call ‘padding’ in this budgeting method, but by adding in some extras here and there, you are able to create a better safety-net for you and your business; one that minimises the impact of nasty surprises. Plus you don’t have to give your budget up when something goes astray because you are not thrown off-track. The best part about the padding is that if you get enough of it put aside you can then choose to spend it on your most pressing cost or goal – pay for some extra advertising or re-work the website. I never heard of any SME owner I getting in trouble for coming in Under Budget!
If you have given up budgeting altogether – give it another go!
– take out any budget gremlins and profit from your new strong budget!
P.S. If you liked this and want more, stay tuned for next week with ‘Two ways we Sabotage our own budgets’
Now that you have a taste of what we can do… here are some more options to improve your business profits: