“If you can’t measure it, you can’t improve it.” – Peter Drucker
A lot of businesses are starting their 2017 budgeting process right now. A budget is a critical tool for all successful businesses. However, many budgets fall short of providing the financial guidance that managers and owners desperately need. Having prepared numerous budgets, I’ve discovered first hand the pitfalls and key requirements of creating a viable budget. The budgeting mistakes most commonly made include:
- Underestimating the cost of expansion. So you own one auto repair shop, opening another should be twice the cost, right? Wrong, expansion frequently means that overhead must increase to handle the additional workload. Don’t forget the additional managerial time and resources required. I recommend a cash flow cushion to help cover any unforeseen costs.
- Overestimating revenue. Just because we desperately hope revenue will increase by 20% doesn’t make it a viable budget number. Revenue projections should be based on a combination of historical figures adjusted for inflation and current market and industry conditions. Additionally, if the company has sustained a major change such as a merger or substantial downsizing, you have to consider the ability of the company to meet previous revenue levels. Generally I advise to remain conservative as much of the budget is typically revenue dependent.
- Overly optimistic expense budgeting. It’s easy to forget about those once a year expenses but also easy to be overly optimistic about cost cutting. You have to review historical trends here and watch out for that “miscellaneous” category. Also make sure that you have a cushion for those unexpected expenses or any known upcoming changes.
- Not having multiple budgets. There are multiple scenarios that can occur and you should be prepared for most of them. Create several budgets based on what the foreseeable future brings. That way you have a map if things take a rough turn down the road.
- Not asking for help. The employees know more about revenue and costs than you may think. You can gain valuable information by asking your employees how to cut costs and improve sales, they’ll even give you new ideas. Additionally, they’ll feel valued and will be on board for making any changes that otherwise may be difficult to implement.
- Not using the budget. After the budget is done, don’t file it away. Use it to analyze results and improve the process. Constant monitoring is critical to being successful in these economic times. The budget is the first step in creating a strong financial reporting system.
- Not sharing the results. If you’ve experienced positive results due to an employee’s or manager’s suggestion, make sure you give credit where credit is due. On the flip side if results are not favorable, be sure to inform but not blame. This information can serve as extra motivation to continue or change behaviors depending on the desired outcome.
What if you don’t have a budget or even know where to start? Most financial software offer tool (Quickbooks has a good budget tool). Budgeting is a key component in our Business PLUS Program, click here for more details.