3 Small Business Budgeting Myths
A bad budget can be the kiss of death for a small business. That’s because a well-made plan to control your finances isn’t just crucial for scaling a business; it’s also necessary to stay financially afloat. In fact, the smaller your business is, the more important the budget becomes because you’re less likely to have padding to absorb unexpected expenses. Here are the top myths that plague small business leaders as they sit down to prepare their budgets:
“A budget has to be grounded in reality.”
Myth: Budgets and forecasts are basically the same thing
Not so fast. A forecast is a business management tool that projects what you think the future will look like for your business, the U.S. Small Business Administration stated. It’s based on estimates and research for everything from inventory costs to customer revenue, and markets and trends can play a heavy role in forecasts. As a business moves through its fiscal year, it’s common to issue forecast revisions to reflect updates in estimates and projections.
A budget, on the other hand, is more like a rigorous financial plan for how you will run the business. It’s less concerned with what the future might bring and much more tightly focused on making sure you can meet your financial obligations each month. Though budgets are distinct from cash flow statements, they’re closely tied to cash flow. A budget also includes fixed expenses, like rent, salaries, utilities, and variable expenses, such as one-time capital costs like purchasing equipment and upgrading facilities.
Myth: A budget has to show a business profit
The truth is: A budget has to be grounded in reality—even if that means barely breaking even this quarter or not being able to take a full salary one month. If you continue to polish and tweak the numbers by overestimating revenue or underestimating costs until your budget shows an artificial profit, you’ve defeated the point of making a budget in the first place, according to Entrepreneur magazine. As soon as the business is faced with a financial hiccup or setback, your cash flow and expenditures will be wildly out of sync with your glass-is-half-full budget—and you’ll be forced to revise. Rather than craft a budget that paints a too-rosy picture, stick with reality and be explicit about the trade-offs reflected in the budget. Maybe a large capital expense or a scaling staff with larger salaries will simply mean thinner profit margins this year.
Myth: Your best bet is to go it alone
Sure, the business leader might know the business inside and out, but that definitely doesn’t mean the budget is a solo endeavor. The most accurate and well-thought-through budgets require input from all department heads. While larger corporations might rely on a financial department to draft and track the budget, small businesses can be well served by contracting an outside accountant. Whoever is involved, make sure that you’ve allocated time properly so that they’re not rushed through the task. And pencil in periodic reviews so that tracking any overages doesn’t fall by the wayside, Inc. magazine recommended.
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