The end of the financial year is a prime opportunity to review old budget habits which could be holding back your business.
Let’s explore some of the most common mistakes small business owners can make when mapping and managing their budget, so you can leave these practices behind as this financial year comes to a close.
When creating budget projections, some business owners simply add a growth percentage to the previous year’s performance. However, relying on this method alone may put you at risk of overestimating your sales and expenses.
Overestimation of expenditures in some areas of the business can prevent proper funding to other areas, where more investment could help the company grow. Overestimating sales, in contrast, could reduce profits and cash flow and mean the business has to cut its operating expenses to compensate.
These are some of the factors to consider for a more accurate budget forecast:
- Market size and dynamics, including seasonal business cycles
- Your competition
- Supply chain issues
- New products or service lines
- Expansion into new locations
- Technological advances
- Other business insights that might affect you.
Not tracking actuals against budget
Your budget represents the numbers your business expects to achieve, while your actuals are the financial metrics you do achieve.
Comparing your actual results against the budget allows you to measure your business’s performance for the year-to-date, to determine whether the company is trending ahead, behind or to plan, and adjust accordingly.
Tracking your actual revenue and expenses against your budget forecast could be a useful exercise to help you make better business decisions. To make this easier, make sure you have the best-fit accounting system, record your expenses diligently and consider investing in technology, such as an expense management app, to partially automate your processes.
Not updating your budget
While some businesses rely on annual forecasts, quarterly budgets may allow you to be more agile. This involves evaluating last quarter’s performance, before setting the budget for the next three months. This will give you an indication of the percentage difference between your budget and actuals for various categories, helping you forecast more accurately.
This approach may be able to assist you to respond to micro and macro business events before they escalate into major issues. Budget updates enable you to analyse your performance to better meet your business goals.
Not budgeting for the unexpected
As many businesses have learned over the past two years, not all business events can be anticipated. Failing to plan for surprises can have a negative impact on your bottom line.
You may require emergency funds to insulate your business against unwanted surprises, such as:
- Invoice delays
- Professional fees
- Taxes and permits
- Replacing or upgrading equipment
- Interest rate rises that may affect your access to and cost of finances, including credit cards
- Higher insurance premiums
- Asset shrinkage (when your inventory doesn’t match your balance sheet because of theft, damage, error, etc.).
Aim for a buffer informed by a formula of your current assets divided by your current liabilities. An approximate guide is three-to-six months of operating expenses. This is dependent on your business and industry type, goals, business stage and access to funding.
We can help
We can help you meet your business goals for the new financial year. Contact us to make sure you have the right finance solutions in place for success.