Take a look at your current year to date actual figures and answer these questions:
- How have you done so far compared to your goal? How well did I budget or was I way off track?
- What expenses sprung up? Could they have been avoided or should I have planned for them?
- How can I better plan for next year?
These are just a few of the questions you need to be asking yourself as you start planning your budget for next year. This will help you prevent the mistakes that you have been making all year.
Here are 5 of those mistakes to help you get started.
1. Not having a budget.
Having a budget is very necessary when you own and operate a business. It’s not enough to have a goal; you have to have a formal plan on how you are going to reach that goal. See a budget is designed to give you a clear cut plan to follow to reach an intended target. Without it you are operating your business blindly. Trying to hit a target that you can’t even see. Have you ever tried to shoot a dart at a bulls eye? Very hard to do right. Well operating a business without a budget is like trying to hit that same bulls eye in the dark. Impossible to hit that target…unless you can see in the dark.
2. Not tracking against your actuals.
Once you have a budget you must compare how you are performing to that budget regularly. Minimally once per quarter. If you don’t do this critical step then you have no idea how good or bad you are doing as compared to that plan. Comparing your budget to your actuals helps you understand what is really going on in your business. It also helps you see how your business is trending year over year as well as compared to your industry competitors.
3. Not following your budget.
Once you create your budget you MUST FOLLOW IT. Say it with me I WILL FOLLOW MY BUDGET. There is nothing worse than creating a budget and not following it. Why create a plan and then place it in a drawer and never look it again? That is the equivalent of not having a budget at all. Would you climb a mountain without a guide? No. Would you buy a house without determining a budget around how much house you can afford and the taxes and the insurance and the utilities. No. So why would you operate your business without a plan? Following your budget allows you to see how you’re doing in your business and it helps you better manage your cash flow. You will be able to see where money is not coming from and where it is going so that you can make any changes as necessary.
4. Not budgeting seasonally.
The key to a good budget is to budget accurately. Realistically. When you create a budget for your business you need to start with a baseline equivalent to how your business did in the previous year. These are hard value numbers that represent the profitability of your business. Without over-budgeting. You also need to factor in seasonality. Placing revenue and costs in the appropriate months you expect them to occur. And I am not talking about seasonality just around holidays, unless that applies to your business. Seasonality based on your industry. For example, tax preparers have to budget higher in July through to October for tax season as well as in May and June for extensions. Landscapers have to budget more from September through to November than during the winter months. Moving companies budgets are higher during the summer that during the rest of the year. Factor in seasonality of your business to ensure that your expenses are covered during the off months.
5. Not budgeting enough.
Lastly, be sure not to under-budget. Don’t underestimate costs that can change the entire trajectory of your business. You have to be certain to factor in the unexpected. Factor in cost inflations and how you can still manage your expenses without any strain. Create a savings plan within your budget. Yes a savings plan. Businesses have savings accounts too.
Check out our free budget checklist to help you get started
1 Set your goal
2 List ALL of your expenses by month.
3 Multiply each category by 12 to determine total spend for the year.
4 Determine your monthly income.
5 Multiply it by 12 to determine the total sales for the year.
6 Compare it to the total expenses by month.
7. Track it. Analyze and make course corrections.
Note: These steps should be implemented on a minimum of a quarterly basis depending on how large or small your business is. Remember the key to financial organization and ultimately financial success is to gain and maintain control over your financial affairs.