Most entrepreneurs start off funding their small business ventures using money from their own pockets. Without a large source of cash to pull from or the means to acquire a loan, it often leaves them with little money to cover operational expenses. Ultimately, keeping costs low means doing a lot of work themselves – including managing finances. While some entrepreneurs do so successfully, others make mistakes that hurt their business.
Small Business Budgeting Mistakes
Although there are several facets to managing business finances, the budget serves as the foundation. It’s essentially a record of revenue and expenses used to plan, organize, monitor, and improve company finances. Budgets are also ideal for decision-making, projections, accomplishing goals, generating reports for taxes, investors, and acquiring financial products such as loans.
As you might imagine, when an entrepreneur makes budgeting mistakes such as these listed below, they compromise their entire operation.
Not Separating Personal From Business
It’s easy to assume that combining your finances is alright since you’re using money from your savings or job income to fund your business. Be that as it may, this decision makes managing your money more challenging.
You don’t have a clear picture of what income you’re using for your household and what you’ve attributed to your business. Your transactions are all recorded on the same bank card and statement. Ultimately, generating reports and filing taxes is time-consuming and challenging.
When you decide to become a freelancer or start a small business, you should open a separate account. One account should be for your direct deposit from your employer and personal expenses, and the other should be used for business-only transactions.
Not Including All Expenses
Budgets should clearly outline your revenue as well as your expenditures. Unfortunately, some entrepreneurs overlook business expenses that end up throwing their budgets off balance. Whether it’s a $50 a month internet bill or a $500 quarterly tax payment, when you don’t account for everything associated with your business, you’ll assume you have more money in the bank than is actually in the account.
A mistake like this could cause you to spend money you don’t have. When you spend what you don’t have, essential business expenses aren’t paid. The most efficient way to ensure you are accounting for all business costs is to review your company bills, bank statements, and credit card receipts. Include recurring, one-time, and periodic expenses as well. As new expenses arise, add them to the budget immediately, so you don’t forget.
Not Having An Emergency Fund
What happens if you have a slow season and don’t bring in enough sales to cover your business expenses? What do you do if the landlord increases the lease amount for your office? How do you deal if your computer breaks down? Just as unexpected circumstances come up in your home life, they happen in business too.
All too often, entrepreneurs forget this and fail to set aside cash in an emergency fund. Then they have no choice but to go into debt to resolve the matter or watch as the problem evolves and ruin everything they’ve worked hard to accomplish.
Ideally, every business should have a savings account with at least three months of expenses set aside for a rainy day. The fund should include bills and payroll for employees (or income for yourself if you don’t have another source).
Not Referencing The Budget To Make Decisions
Entrepreneurs are charged with making a lot of decisions to push their business forward. Whether it’s purchasing new software, investing in marketing, hiring new staff, or considering an expansion, most of the decisions an entrepreneur makes are tied to finances. Although budgets provide insight into a company’s finances, novice entrepreneurs ignore the facts when making decisions – and suffer immensely.
A great rule of thumb to consider is reviewing your budget before making any decisions related to your business. When you compare your revenue to your expenses, you can determine whether something is affordable and, ultimately, beneficial to your business.
Budgets are an essential tool for small businesses. When used efficiently, they can help guide entrepreneurs in making economically rational choices to advance their company’s goals. Be that as it may, business owners can only reap the benefits of a budget when they create, manage, and use it effectively. Though budgeting is a complicated task, entrepreneurs are encouraged to avoid the mistakes listed above to achieve success.