Budgeting is a crucial aspect of running a small business. It may seem more fun to operate with a fly by the seat of your pants mentality. But that can get a business in trouble fast, especially when you’re just getting started or if cash is tight.
Even when you have a budget, things can go upside down quickly sometimes. That’s why it’s critical to not just have a budget, but to be prepared for situations that can cause even a well-planned budget to fail.
1. Not Planning Far Enough Ahead
One of the top reasons budgets fail is not thinking far enough ahead when creating a budget. A business owner starts their business and plans the first three months in great detail. They decide they’ll worry about the rest of the year and future years once they see how the first few months go.
The problem here is that the first few months fly by as starting a new business is super time-consuming. During those months you have so many other things to do, you just don’t have time to be playing catch-up on budgeting.
The solution is to budget at least a year in advance, even if you don’t budget each month individually. You may even want to briefly plan, or at least consider what the next two or three years might look like. This gives you plenty of time to work on the budget for the subsequent years. You also have plenty of time to adjust and get more in line with your projected budget.
2. Spending Too Much Too Fast
Another big potential problem is when you send your budgeting money too quickly. Often times businesses will allocate a certain amount of money to marketing, but then they’ll spend all of that money in the first few months of the year.
The problem here is multifaceted. First, you have no money to market for the rest of the year, or alternatively, you’ll need to shift money from somewhere else. Next, if your marketing efforts were a bust, you wasted your whole year’s budget. Whereas, if you’d spent a small portion, you’d be able to move on and try something else.
The solution is to spend your money as evenly as possible over the time period for your budget. If your working with an annual budget, divide by twelve and don’t spend more than this amount in any given month. There will, of course, be exceptions, and if you’re a retail business, you may even want to spend slightly less in the early months of the year. Then you’ll have more money to spend during the holiday season when you make most of your money and advertising is potentially more expensive.
3. Not Doing Regular Budget Reviews or Check-ups
Many business owners entirely skip budgeting. While this is a bad practice, it’s almost worse if a business creates a budget but doesn’t do regular check-ups. What’s the point of having a budget, if the business is not checking in regularly to ensure that their actual spending is within budget?
In this scenario, the big danger is that a business owner will become super confident because they think they’ve planned out this super successful budget. Then one day, that owner looks in the bank account and wonders where all of their money has gone. They look at their spending for the year and realize it’s nothing like what their projected budget had planned for.
The solution here is to do regular reviews of your actual spending and compare that to your budget projections. If they don’t match up, you have plenty of time to decide if you need to modify your spending habits or adjust your budget. You’ll probably need to do a little bit of both, but then you’ll have a more realistic budget moving forward. Ideally, when you do your next budget review, things will be more inline.
4. Not Taking the Budget Seriously
Some business owners are also prone to compare their spending to their budget and ignore or overlook any discrepancies. They will think to themselves we were only off by 10%, so we’ll just make some slight adjustments as the year goes on.
The problem here is that they didn’t really make the necessary changes to their budget to reflect the reality of the situation. They just basically mentally took note that things were close enough. It’s very unlikely they’ll make the needed changes the following month, and things will continue to compound until they’re in a dire situation. And at this point, it will be nearly impossible to right the ship.
The solution is to take your budget seriously. Whatever budgeting you decide is worth your time to do, take it seriously. You spent valuable time creating that budget, you might as well take advantage of it. By taking full ownership of each budget shortfall as quickly as possible, you maximize your ability to make changes that will resolve the situation. This may be allocating more money to that area of your budget, or trying to reduce or eliminate the least productive spending.
5. Not Planning Ahead with the Budget
Another pitfall businesses run into is not planning for things that will inevitably happen in the future. A business will have this great budget, but fail to plan for a large known capital expenditure that will happen next year. Or they’ll be totally unprepared for when a piece of machinery or equipment breaks down.
The problem in this scenario is that the budget didn’t take into account things the business knows will happen. Things break, and you need to be ready to replace them when they break. Likewise, consider any potential expansion or other capital outlays you’ll need to make or may be forced to make in the next few years.
By planning ahead for all of the most likely situations your business may encounter, your budget will be far more robust and able to sustain your business through tougher times. The only caveat here is that you don’t waste time on things that are either very unlikely to happen or no amount of money will fix. These are the types of things that you can better protect your business from by buying insurance or doing better strategic market planning.
6. Calling Unneeded Budget Audibles
Some business owners absolutely love to be in super control of everything. Worse yet, is that some of that subset of owners measure their control by their ability to make huge unexpected changes. They’ll think to themselves, “we spent all of this money on that campaign last month, we need to stir things up and spend even more money on this other crazy campaign this month.” Or they’ll totally cancel a campaign that is working just to change things up.
The problem here is there is no rhyme or reason to any of these changes. In addition to the havoc this wrecks on planning and employee morale, it will also totally lay waste to any budget. When decisions are constantly being made on the fly for no reason other than to change things up, it’s impossible to plan or budget. Anything could happen at any time, and a budget relies on consistency to a certain degree.
Businesses that operate this way are prone to huge swings in revenues and expenses. They’ll be super profitable one day and bankrupt the next. No budget or other strategies can fix this. The only solution is to change the decision-making process to be more rooted in the reality of the current business goals and budget. Calling crazy audibles with spending should be reserved for extreme situations.
7. Leaving Critical Budget Items Off the Books
Finally, some businesses will look financially solid with well thought out budgeting that matches profitable P&L statements. The business appears to be super successful, and then one day the business will realize they have no money in their bank account. Or worse yet, the business will have money, but the owner will be personally bankrupt.
The problem that may have occurred here is that the business was spending money on items not in the budget, and they were also not keeping track of these expenses in their accounting software. Or the business owner was spending personal money on business expenses without realizing just how much untracked money was being spent of their personal funds.
The solution here is to make sure your budget reflects all of the money you might spend on your business. Never think any category is too small to include in your budget, even if you have to consolidate them into a bigger “other” category. More importantly than budgeting these expenses is making sure that your accountant knows about them and they’re tracked in your accounting software. This way at least you’ll see the discrepancy between your budget and your spending.
Reasons Small Business Budgets Fail
There are plenty of reasons small business budgets fail, but almost all of them can be protected against. These are just our top seven reasons, so you should always be on the lookout for similar situations that could needlessly put your budget in danger.
If you plan ahead, be consistent and keep accurate records you’ll avoid 99% of problems that can cause your small business budget to fail. Plus, when your budget succeeds, you’re far more likely to follow your entire small business plan and meet the goals you’ve set for your small business.
Have a story about how a small business budget failed? Or maybe you have another pitfall that you narrowly avoid or almost caused a huge headache to your budget. Let us know in the comments and help us save a fellow business owner from a potential budget nightmare.