8 Budget Traps and Tips to Avoid Them
This time of year Budgets tend to be finished and shoved in the bottom draw…
Whoops – Budgeting Trap Number 8!
Read on to discover if you are guilty of others; and how to avoid them all.
But, Firstly some definitions:
– Your Budget is a listing of what you intend to earn and spend, usually during the coming year, split into months. It outlines what you want to get done in your business in monetary terms. Budgets are also usually tied to forecasts.
– Your Forecast is a reflection of how your business is expected to track, based on what you have done to date, what you said you were going to do (your budget), and therefore what is left to get done.
Set your budget at the beginning of the year, track your progress for what you have achieved and then adjusts it to create a forecast of what you still intend to achieve.
Budget Traps and Tips to Avoid them:
(Avoiding these traps will make your budget work better for your business)
Misunderstanding the purpose of Budgeting
A Budget takes the concepts of your business planning and actualises them – setting timing and costs against estimated revenues, leading to the bottom line as a reality check. It’s the planning that matters, not just the document. From your plan, the Budget creates the money map you are intending on using for the next 12 months, and by locking this down, not only you as the business owner, but your staff and even your customers can be clear about what you want to achieve.
Doing it in one big Push
Don’t avoid this because it is too overwhelming or too time consuming – just do it in pieces and steps; start anywhere and get going! Do the part that interests you most, which generally is the Sales/Revenue line; or the part that provides the most immediate benefit – the costs that are set from year to year such as insurance and rent; whatever. . . just get going!
Keep it real, it can be demotivating when your business is miles away from where the budget predicted, and unhelpful for decision making… If nobody believes sales are going to increase at 100% per month don’t put it down in your budget – use a more realistic figure! The point is you can go and adjust it during later months to create a more accurate forecast.
Hiding your plan from your team
It’s a management tool. Use common sense about what you share with everybody on your team, keeping some information, such as individual salaries, confidential. But do share the goals and measurements; share the sales targets, advertising spend, even right down to how much you spend on stationery etc. Shared knowledge keeps the team working as team.
Confusing cash with profits
There’s a huge difference between the two. Waiting for customers to pay can cripple your financial situation without affecting your profits. Profits are an accounting concept; cash is money in the bank. This report is only working on Profit, so ensure you mind your cashflow too!
Avoiding the details
Use as much detail as you can when it comes to assigning costs to what’s supposed to happen and who’s supposed to make it happen. These details really matter. Your budget is wasted unless you include details because you are unable to use it to compare what you have done with what you needed to do.
Sweating the details for the later years
Keep it real – How can you project monthly inventory three years from now when your sales forecast is so uncertain? Sure, you can plan in five, 10 or even 50-year horizons as annual snapshots, but you can’t accurately Budget in monthly detail past the first year. Nobody expects it, and nobody believes it, so stick to working on the details for the shorter term.
Finishing your plan
If your budgeting is done, then your business is done. It should always be alive and changing to reflect changing environments, timings and assumptions. Best practice is to use a rolling budget which always reflects your planning for 12 months in advance; adding a new month for next year as soon as the current month is completed.
Go and dig-out your budget today, review it to ensure all of these budget traps pitfalls are avoided and move through the next financial year with fewer surprises…!