'Every business, large or small, has to have a long-term vision for itself and a series of short-term plans for how to achieve their vision. Budgeting helps businesses achieve these visions and plans,' explains the Practical Accountancy Loose Leaf.
But, when employers have a closed-minded view on its company budgets, it can lead to big mistakes. Here are three mistakes you're likely to make and what you can do to overcome them so they don't negatively affect your company's ability to roll out new projects.
Three common budgeting mistakes company's make – and how to avoid them
One of the biggest mistakes people make with company budgets is to use incremental budgeting, explains the Loose Leaf. Essentially, this means taking last year's budget and add a percentage, which is usually related to inflation.
Why shouldn't you do this?
Because inflation isn't a single number. 'The South African Consumer Price Index is made up of a basket of more than 400 items, broken down into 12 major categories of consumer expenses, each one of which increases at a different rate,' says the Loose Leaf.
And that means using an inflation figure won't be an accurate way to budget because it isn't based on your company's true performance. As such, it won't be a true reflection of how much money you should be allocating to new and existing projects.
The second big budgeting mistake is not understanding the fine line between control and planning.
'Planning involves developing objectives and preparing budgets to achieve these objectives. Budgets allow you to anticipate problems to establish where potential strengths and weaknesses lie in your operations for the next year. Control involves the steps taken by management to ensure the objectives are attained,' writes the Practical Accountancy Loose Leaf.
If you use your budget as a whip to 'beat people' into shape, you'll find your employees will do things like increasing expenses and reducing revenue because they know you'll change the budgets or hold them to achieving often unrealistic targets.
And finally, don't make the mistake of having a 'chiselled in stone budget'.
Budgets are a working document and you need to treat them as such. Accept they can change as circumstances either inside or outside your company change.
NOTE: By understanding what not to do with your company's budgets, you'll always be able to tweak them here or there to allow for funding of new projects and ensure you're not wasting money on projects that don't deserve your employees' time or attention.