You draw up a budget to help your company reach its goals for the year. You plan out your expenses and your income to ensure you come out with a profit.
But your budget will be useless if you've made a big mistake in it!
Read on to discover the three most common budgeting mistakes businesses make so you can avoid making them yourself.
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Businesses make these three common budgeting mistakes
According to the Practical Accountancy Loose Leaf
, these are the three most common budgeting
mistake business make. And they can render even the best thought out company budget completely useless.
And that's why you need to avoid:
1. Incremental budgeting;
2. Confusing control and planning;
3. 'Chiseled-in-stone' budgets.
Let's look at what these all mean…
Three accounting record risk areas to watch out for
More about the three common budgeting mistakes
Budget mistake #1: Incremental budgeting means you take last year's budget and simple add on an inflation percentage for this year.
The reason this won't help you is inflation isn't one set number. It may not affect your electricity the same way it'll affect your supplies.
Each year, you must draw up a new budget and account for each expense for your budget to be accurate.
Budget mistake #2: Confusing financial control and planning can really mess up a budget. When you plan, you develop objectives and prepare budgets to achieve these objectives. Budgets allow you to anticipate cash flow problems to establish where potential strengths and weaknesses lie in your operations for the next year.
Financial control involves the steps taken by management to ensure you achieve your objectives.
If, in control mode, you use the budget as a whip to 'beat people' into shape, you'll find people start to play.
And finally the biggest mistake most people make is this one.
Budget mistake #3: The final budget mistake you must avoid is treating your budgets like they're carved in stone and you can't change them.
You must use your budgets to plan and control, but you must also accept they can change. These changes happen as circumstances inside or outside your company change.
Your budget must be flexible, because a budget that no long applies to your company because circumstances changed is useless.
Avoid these mistakes and you'll have a budget you can really use to help your company grow.