5 Common Budgeting Mistakes to Avoid

In a dream world, revenue would always trend upwards and you’d have access to an unlimited source of funds for your business.

However, that’s not the reality for most small businesses. Operating your business involves balancing your revenue with expenses to ensure that you have enough cash in the bank to cover your expenses each month.

Striking the perfect balance between revenue and expenses all comes down to your ability to budget.

Budgeting isn’t something that comes easily to some business owners. As a result, it’s easy to make seemingly small mistakes that could cost you big time.

In this guide, we’ll show you five common budgeting mistakes that can put your business in a hole that’s difficult to dig out of. More importantly, we’ll give you tips to avoid these mistakes so you can stay on budget and put your business in a better financial position.

Mistake #1: Overestimating Revenue

One of the biggest budgeting challenges for businesses is that revenue can be unpredictable. Whether due to seasonality, market trends, or other factors, your revenue may fluctuate from time to time.

While this is completely normal, it can cause you to overestimate your revenue throughout the year if you’re too optimistic about your growth.

As a result, you could overspend, leaving you struggling to cover expenses.

How to Fix It

The good news is this mistake is fairly easy to correct by being realistic about your revenue projections.

If you’re constantly overestimating your revenue (or not doing any revenue forecasting at all), here are a few pointers:

• Use historical data: Look for trends in when revenue went up or down and how much it increased or decreased month over month. Use that data to inform your projections going forward. This can dramatically improve the accuracy of your revenue projections.
• Sales pipeline: If you’re in the B2B space, use your current pipeline to forecast how much revenue you can reasonably expect to generate over the next few months. Account for your average close rate (and time) and other factors to get a more accurate number.
• Account for abnormalities: If you plan to run a Labor Day sale, launch a new product, or temporarily close for renovations, it’ll impact your revenue. Plan for this going forward and also keep it in mind when you’re reviewing your historical data.

By taking a data-informed approach to revenue projections and considering all relevant factors, you can avoid the mistake of overestimating revenue and create a more accurate and effective budget.

Dive deeper: Revenue Forecasting: 3-Step Guide

Mistake #2: Underestimating Expenses

Generally speaking, expenses are more predictable than revenue. Still, it’s easy to underestimate expenses in your budget, which can lead to significant cash flow problems.

How to Avoid It

To avoid this mistake, it’s important to consider all your expenses when creating your budget.

Your expenses will fall under one of two categories:

• Fixed expenses: These are expenses that remain constant, such as rent or salaries
• Variable expenses: These are expenses that can fluctuate, such as marketing or inventory costs

In addition to these, you also need to consider any unexpected costs like legal fees, emergency repairs, or other one-off expenses.

Unless you have a crystal ball, you likely won’t see these unexpected expenses coming. To prepare for them, consider setting aside a portion of your budget specifically for contingencies.

Dive deeper: How to Build a Budget Forecast From Scratch

Mistake #3: Not Using The Right Tools

Approximately 75% of businesses have transitioned away from recording their finances on paper. While that’s great news, many of those businesses shifted from paper to spreadsheets.

While spreadsheets are a big upgrade from paper ledgers and receipt books, they come with their own limitations:

• Collaboration is difficult
• Reporting is limited
• You have to copy/paste data into your sheets
• It can be tough to analyze problems in your budget

And that’s just to name a few. Thankfully, there are better options available that can help you take your budgeting process to new levels.

How to Fix It:

Not-so-shameless plug, Finmark from BILL is an excellent tool to help you build, forecast, and analyze your budget. Here’s how:

• Integrations: Connect your accounting and payroll tools and automatically update your actuals each month without all the copying and pasting.
• Forecast: Dynamically forecast expenses based on the levers that matter to your business.
• Spot variances: Easily see variances between your projected budget and actual performance, and dig into the root cause.
• Build multiple budgets: Duplicate any budget with a couple of clicks, update your assumptions, and compare them side-by-side.
• Analysis: Analyze your expenses by department, vendor, and more.
• Collaboration: Leave comments and notes for budget owners so critical information doesn’t get lost in emails.

Dive deeper: Centralized Budgeting With Finmark

Mistake #4: Not Budgeting For Growth

Your business is doing great and growing quickly. But have you accounted for the cost of this growth in your budget?

While growth is a great sign and something every business strives for, it also comes with new challenges, such as:

• Staffing: Sometimes growth necessitates a bigger team. A common issue growing businesses run into, though, is overhiring during high-growth periods.
• Supply and demand: When you’re growing quickly, customers may demand more product than you can afford to supply. Inventory management is a crucial part of the budget for fast-growing businesses.
• Organization: As businesses grow, finances may become more complicated. It’s more difficult to track how much each department is spending and there are a lot more stakeholders. This can create miscommunication and oversight if you’re not careful.

How to Avoid It:

Flexibility is the name of the game here. Flexible budgeting is an approach that allows you to build your budget based on projected revenue. This is particularly helpful for variable expenses.

Flexible budgets often use a percentage of your projected revenue to account for variable costs rather than assigning a hard numerical value to each expense. This allows for budget adjustments to occur in real-time, taking into account external factors.

You update your revenue projections each month based on the most recent data, then use those projections to adjust expenses as necessary.

Dive deeper: Flexible Budgeting 101

Mistake #5: Only Making One Plan

You’ve probably noticed a common theme within all these mistakes so far—budgets need to be adaptable.

Just because your business is doing great today doesn’t mean it’ll stay on that trajectory forever. Likewise, if you’re going through a down period, there may be tremendous growth on the other side of the mountain.

If you only have one budgeting plan based on your current situation, you could be left scrambling when things change.

How to Avoid It:

Scenario planning can work wonders in this situation. Scenario planning is the process of creating financial plans based on various potential outcomes for your business.

Generally speaking, we suggest making at least three budget scenarios:

• Base scenario: Assumes your business will stay on its current trajectory with no significant growth or decline.
• Upside scenario: Assumes your business will experience moderate to significant growth.
• Downside scenario: Assumes your business will experience moderate to significant decline.

The guidelines you place around your assumptions will vary based on your business. For instance, one business may consider 10% revenue growth to be significant for their upside scenario while another might set a threshold of 20%.

Customize your scenarios based on your historical trends and the data you have available.

Dive deeper: How to Do Scenario Analysis: Step-By-Step Guide

Ready to Level-Up Your Budget?

If you’ve struggled with any of these budgeting mistakes, today is a great time to make a change.

Start your free trial of Finmark to see how it can help you avoid these mistakes and build a more accurate budget you can rely on!