Goofing your Budget can lead to Business Failure!
Are we the biggest threat to our own budgeting success?
Budgets often flop because of structural faults such as missing information and spreadsheet errors – however, it is also quite possible to build a very sound budget then unwittingly goof it up.
The truth is how we approach our budget (as opposed to our budgeting methods) can be the key to our success.
Don’t Goof your Budget!
Budget Goof 1 – Not Living by the Budget
Even after going to a huge amount of trouble, it will only be a useful business tool if you use it properly and don’t undermine your own goals. Why invest the time in making a budget if you are not going to follow it? Not getting started is one thing, quitting half way through is another road-block, but after making the initial effort, you may as well start using your budget for making positive changes.
There are two distinct paths for not sticking to our budget:
a) Pretending it Doesn’t Exist
– Once you have finished your first draft, you pat yourself on the back and pop your budget in the bottom draw; poor thing, never again will it see the light of day. You don’t plan by using your budget, you don’t track your expenses on your budget, you forget it exists as you travel through your business weeks until next year when you sit down and do the next draft.
SOLUTION: Keep it handy, and start to use it rather than “write and forget”. OK so some of us have a tendency to buy fancy new tools or cooking gizmos and then we slowly migrate them to the back of the cupboard never to come out of their packaging (well maybe that is just me??) Anyway tools are designed to be used, to make our lives easier – ignoring your budget is no different to neglecting your new tools. Keep it handy and give working with budget a go for at least six months – in that time you will become both comfortable and confident at using it to understand your spending habits and needs. Budgeting isn’t some new-fangled kitchen gizmo complete with empty promises – instead it was developed and used by business people of all sizes and industries for the last 500 years – it really can work to improve your profits!
Remember your budget is a decision-making tool – even if it is 50% wrong, it is still 50% more help than having nothing at all in place!
b) Rationalising – Meet my friend “Pretend Murphy”*
Murphy’s Law states that anything that can go wrong will go wrong – you’re late for the tram, drop you phone as you are running and it smashes to pieces. Up’s and down’s happen, so build in savings to your budget to cover emergencies and protect against Murphy – buffers and savings are covered in last week’s post (link included above)
However, the problems aren’t always Murphy’s Laws…It is more often than not his pesty cousin; “Pretend Murphy”. Pretend Murphy is a rationaliser, someone who convinces us to see emergencies when they really aren’t there. For instance he visits when an “incredible deal” arises, like that “business trip” to the Bahamas during winter, and convinces us that “just this once” we can bend the rules we set for ourselves and break our plans. The real truth is the “incredible deals” happen every twice a year, and the purchase really should have waited until the shop refit was finished.
SOLUTION: Many things we spend money on dress themselves up as needs when they’re really wants. Don’t let yourself be fooled! If you don’t have to have it, you haven’t planned for it, and you don’t have a comfortable place for it in your budget, then save your money and spend it as you intended, at least for a while.
This one area probably trips us up more than anything else, creating false emergencies ruins thousands of budgets annually.
Budget Goof 2 – Not Changing or Adjusting
Some people drop their budget instead of changing – the old “ostrich with her head in the sand” trick! There is little merit in this, because it
SOLUTION: As new income and expenses arise your previous planning becomes inaccurate, so look at the causes and then adjust. There are two easy fixes, and sometimes a combination of both may be in order:
a) Change your Budget
Reallocate funds between expense categories if you need to re-prioritise where you spending must focus, or add to your savings or investment lines if you have more income. This is your SME, your Budget, and your Decisions – don’t worry if you get it a bit wrong and have to switch and tweak. 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.
b) Change your Spending Habits
If your planning wasn’t accurate because you keep getting hijacked by “Pretend Murphy”, or any other excuse to spend on unplanned items then commit to changing, and really start your own business transformation. Start by including a budget line for ‘unplanned expenses’ and the work towards reducing the unplanned spending and converting it into planned spending – this is a bit like cutting back on cigarettes rather than going cold-turkey. The process of tracking and watching where you money goes (even if it goes on non-essentials) will refine your knowledge so you can clarify your business decisions for more profit.
Think you’ve got some more Excuses to Avoid or Sabotage your Budget?
- It doesn’t matter that you may not know what is going to happen – put down what you would LIKE to happen – the benefit is a very clear way for you to establish your measures of success for the year to come.
- It doesn’t matter if things change as you go through the year – you can adjust your budget to reflect new goals or challenges – the benefit is you can also clearly see the impact and outcomes of these changes and when, where and how to make management decisions to stay on track.
- It doesn’t matter if you get it totally wrong to start with – the benefit is you will learn more about your business is actually doing, instead of acting on what you assumed your business was doing.
- It doesn’t matter if you don’t share it with anyone – ideally you will create your budget and plans involving your team, and maybe even your customers and suppliers, to get a really clear picture and set achievable goals; but if you want to build your confidence first – go right ahead.
If you need help getting started, or don’t think either of these apply to you, there are about twenty posts on this blog related to the ‘budgeting’ subject covering various aspects including:
If you have given up budgeting altogether – give it another go!
– being aware, and curbing, your own habits and idiosyncrasies can go a long way towards improving your success and profits!
P.S. Credit where credit is due – I didn’t invent the “Pretend Murphy” – but it is so clever, once I found it I wanted to re-used it here – for the original post see Brian Fourman from Luke1428 http://luke1428.com/4-reasons-your-budget-isnt-working/
P.P.S. – This post is a rework of an earlier one Budget Sabotage that ranked poorly – but I feel this message is important so I have tweaked it a little to be more user-friendly (I trust). Thanks for bearing with me if you have read this before – Eve
Now that you have a taste of what we can do… here are some more options to enhance your business profits: