Good Business Budgeting Practices

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EPIC ARIZONA ACCOUNTING SERVICES

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Our articles are present for the sole purpose of educating our current and prospective clients. The information in these articles are not intended to be used as professional business advice.

Common Mistakes in Business Budgeting and the Importance of This Practice

Only two years! This is the length of time that approximately 66% of all new businesses will survive. Only half of those will last for up to five years. According to the Bureau of Labor Statistics, only one-third of new businesses last for ten years or more. 

Business Budgeting and Cash Flow Challenges

Fascinatingly, a massive 82% of all organizations that end up failing do so for essentially the same reason: cash flow issues. Cash flow doesn't simply refer to the total amount of money going into an account. It also includes the timing of that money, among many other factors.

Very rarely do invoices get paid when they should be. Loan payments are past due before cash is deposited into an account. Businesses are penalized because of these factors. 

This is why business budgeting is of the utmost importance. While short-term transactions are important, long-term transactions are far more important to the structure of any business. In order to achieve business goals such as location expansion, upgrading equipment, or adding more valuable employees, you need to make sure you’re in good financial standing. That’s where business budgeting comes in. 

66% of all businesses fail within their first two years.

The Importance of Business Budgeting

Business owners can make simple mistakes that have a huge impact during the process of business budgeting. Some of these mistakes can be truly detrimental to their financial health. For example, assuming that the determined budget for the prior year applies to the current year is a common mistake. 

Last year’s budget will not be the same as your current budget because circumstances are continuously changing. If your goal is to grow your business, which is the objective for most business owners, then your budget will continue to evolve. Imagine if you attempted to use your budget from 2019 for your 2020 projections. The COVID-19 pandemic hits, and suddenly your finances are thrown into chaos, making it incredibly hard to move forward. 


Last year’s budget will not be the same as your current budget because circumstances are continuously changing.


The same thing goes for an unexpected change in consumer purchasing behavior. To give you an example, imagine that there is a company that depends on product sales and they accidentally under-predict the demand for that product right before a big season or event approaches. The reason for this instance could happen if an associate wants to set an overly ambitious budget goal. Unfortunately, once this budget is set, it affects the entire company because demand was based on that sales forecast, creating a higher demand for production as well. As a result, a large sum of money is left on the table due to bad business budgeting and poor practices pertaining to this area.

One big mistake that many small businesses also make is basing their budget on things that aren’t practical. They may use their gut instincts as opposed to the quality data they’ve accumulated, which translates into more accurate estimations. This can result in going way over budget during the following year. 

Business Budgeting Solutions

The best solution to these budgeting problems is to utilize previous data so you can acknowledge past trends and patterns. What were your peak operating hours or when did your sales spike throughout the year? How can you alter your goals to meet business demand? For the best possible results, you need to ask yourself these valuable questions and rework your strategy. 

A good practice that can benefit your budgeting strategy is listing out a few key details. This includes your projected sales for next year and any fixed expenses that you have. You should also calculate office rental space, equipment costs, and all other expenses. This will allow you to contextualize things so you can gain a better understanding of what you need to do to accomplish your budgeting goals.

Business Budgeting and Excess Funds

Last but not least, another big mistake most businesses make is failing to reinvest profits back into their business. Your goal is to make your business grow. However, it’s extremely hard to accomplish this if you’re not utilizing excess funds appropriately. Oftentimes, business owners will feel the urge to set aside excess funds as opposed to using them proactively. 

On the other hand, applying excess funds towards business loans or creating an emergency fund isn’t necessarily a bad idea. However, best practice is to put those funds back into the business where they are needed most. This will help to enhance your overall operations.

It’s advised that on a monthly basis, business leaders should assess their leftover budget and develop a strategic plan on how they can put it back into the business. This will prevent you from missing out on key growth opportunities.

All in all, business budgeting plays an imperative role in running a successful business. With everything we’ve covered here, it’s safe to say that it’s very easy to make little mistakes that will have a big impact. You need to be completely aware of your current situation so you can make accurate predictions for your future. Whether it be two years, five years, or ten years from now, every step taken will affect your overall outcome.