It’s the new year and many of us are gearing up and preparing for it. One of the items on your list will be the business budget – your roadmap for the next 12 months.
A budget guides you through the year and ensures sensible and essential spending of the money that pours in.
While many business owners take the time to create a budget, there are some shortcomings that surface again, and again.
Here I will share 6 budget pitfalls that you can make sure to stay clear of in 2017. Use it to create your 2017 budget or to relook at the budget you have already worked on for 2017.
One can easily forget to include expenses on your budget that are not mainstream. Items that do not fall into the category of salaries, maintenance, transport, utility bills and connection costs may go by the wayside.
You will need to perform some of your own research to identify all costs that you incur. A good place to start will be to look at what items you have paid for in the past.
Do not limit yourself to just one source:
- Look at the bank statements of the past 3 months. Skim though all the expenses and you are bound to find a credit card charge or debit order that you have overlooked.
- Have a look at your most recent financial statements. Is there something disclosed that you may have forgotten? A lawsuit that is pending for example?
- Have a look at your prior period budget to check if you have missed anything out this time round.
- Look at petty cash expenses of the prior year – you may have omitted small expenses such as tea and coffee expenses, staff lunches and birthday gifts.
The success of a budget being your roadmap is ensuring that you have included all the expenses that your business experiences. Take extra care to ensure the completeness of your expenses.
2Sales projections not realistic
Sales are the driving force of your business. Without it, your business would be unable to sustain itself.
Sales is the driving force bringing money into the business. Your level of expenses per your budget will depend heavily on the accuracy of this figure.
Therefore, I stress that the increase in revenue for the coming year be analysed with extreme scrutiny.
Too often, the sales figure for the budget is estimated at a flat increase of for example 10% from the prior year. Yet this figure is not sufficiently backed up. This is especially true if the prior year increase was a mere 2.5% considering the trying economic environment.
Whatever increase is used in your budget; you must be able to back it up. Here are some tools you can use to determine what increase in sales you should use in your budget.
Related: Budgeting Basics
Try using more than one to obtain a more holistic feel of the increase that should be applied:
- Speak to your sales team – get their insight as to how they see sales increasing in the current year because they have their finger on the pulse. If you handle the sales yourself, perform a detailed analysis of your sales figures. How did your customers feel going into 2017?
The more optimistic the arena, the greater your chance of scoring new clients.
- Perform market research. There are companies out there who offer market research packages. Perform detailed market research to find out what your current and potential clients are thinking for the new year. Use the results to estimate an appropriate sales growth rate.
- Analyse the sales figures of the prior year. Is there a specific month when sales skyrocketed?Why? Is it bound to happen again this year?
- Analyse the future periods. Are you planning to offer a new service in March 2017? Think of how you expect this to increase your sales from March 2017 going forward and adjust your budget to account for this.
- Look at what the industry is doing. Do some research to determine what the industry expects to do in the next 12 months. If it has an average of a 3% increase, your projections should speak to this. An increase of 20% would be unreasonable in this instance.
- Don’t be scared to use different percentages for different months. Some months may also see a contraction in sales – that is reasonable if for example the previous month had a sharp increase.
Don’t be afraid to be too detailed in your analysis of sales because this figure is so important. While you cannot possibly be 100% accurate, you could try to get pretty close if you pay attention and put in the effort.
3Blanket increases for expenses
It is dangerous to apply a blanket increase to the expenses in your budget.
A blanket increase can apply to a certain group of expenses – those that will increase in line with inflation for example. However, most expenses will need due attention if you want your budget to be realistic.
Each expense should be increased in line with that that which drives the expense.
Let’s look at a simplistic example. If you expect sales to decrease by 5% in the coming year, the costs driven by sales would also decrease by a similar percentage.
If you drive to your clients daily as part of your service to them – your petrol expenses would go down. Cost of paper used for new client contracts would go down. If you are a manufacturer, your manufacturing costs would go down.
Salaries should move with the salary increase expected as well as headcount.
If you expect a certain expense to vanish then this should be included as well. For example, if you are doing away with weekly staff lunches then this should be removed from the budget completely.
Marketing expenses should move with how vigorous you expect your marketing to be in that year. Do you intend on putting up a billboard or are you tuning to social media to spread the word?
Smaller expenses such as postage costs and stationery can be lumped together and increased by inflation. This is assuming that you will be using the same quantity as the prior year.
Expenses should be increased or decreased in line with the drivers of that expense. Do not opt for a flat blanket increase/decrease to expenses when preparing your budget.
Related: Streamlining Budgeting and Forecasts
4Not using the budget to benchmark against
Your budget serves as your plan for the next 12 months. It should thus be used as a template for your income and expenses for that period.
Each month, you should assess the actual amounts as compared to the budgeted and identify any variances. Variances should be explained since you have accounted for the most likely scenario in your budget.
For example, if your sales have declined as opposed to an increase when you introduced the new service, you should be able to explain why. You may have offered the service free for the first month or perhaps your clients found a cheaper alternative.
If your salary expense increased more than what was expected, you could explain that you needed to hire a temp to assist with a sudden surge in demand for your product or service.
The budget compared to actual will indicate to you where you are overspending. You can then focus on this expense and better control it.
This will assist you in reaching bottom-line targets.
It can also indicate to you whether your sales are progressing as planned.
If you are achieving less sales than expected, you may be falling short of the competition. Or you could be the first to identify a contraction in the economy’s demand for your service.
You could draft a perfect budget but if you do not use it for its intended purpose, it’s for naught.
5Prior period errors not re-visited
Your prior period budget errors in estimation should be used in the current year. It tells you where you have fallen short.
You could have been overoptimistic of sales figures in the prior year. Or you could have used an incorrect driver in estimation of a specific expense.
Use your prior year budget as a base to improve your estimation in the current year budget.
Instead of making the same mistake again, use your prior year budget to make your current year budget better. In this way, each year will be an improvement of the year before.
Budgets help you to manage your business better. It tells you when your sales are off the mark and when an expense if going out of control.
Its purpose need not only be for the financial year. It can even be used to plan the expenditure of a specific project. You could track this project through to completion using your in-depth project budget versus actuals.
Over time, your budgeting skills will improve and so will the management of your business’s finances.
Avoid these 5 budget pitfalls and be on your way to a better managed business.