Business reporter, Carol Tice writes on AllBusiness.com that small businesses often skate by without a budget, or with one that's oversimplified or inaccurate. Next thing you know, the company is in a cash crisis or out of business.
The good news is you can avoid this nightmare.
All you need to do is stay away from these three common budgeting blunders when creating your company budget.
Avoid these three mistakes when creating your company budget.
According to Tice, to create a solid budget you can rely on for your business planning, avoid these three budgeting mistakes:
Budgeting blunder #1: Setting unrealistic sales projections
Often small businesses pick a figure out of the air for future sales rather than reviewing past sales patterns and conducting market research into industry sales trends. They create fever charts that show sales will grow exponentially in an attempt to impress potential investors. But more often than not, these predictions don't come true, says Tice.
So take a hard look at your past sales, market conditions and any changes in your competitive landscape to create a realistic sales forecast.
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Budgeting blunder #2: Ignoring cash flow
It doesn't matter how many sales contracts you're signing if you're not getting payment and the bills are due.
You need cash flow to keep things running.
So, one of the key metrics to watch in any budget is cash flow.
Budgeting blunder #3: Creating a budget, then ignoring it
According to Tice, a good budget is a living, ever-changing document, not a ritual you go through once a year.
She says, if you throw together a quick budget and then toss it in a drawer, you're not getting any value from the process.
'Each month, compare your real numbers with the ones in your budget. If you see a trend, income is rising faster than predicted or accounts receivable is taking longer to collect, adjust your budget for upcoming months to reflect reality. If costs are higher than expected, crack that box of receipts and figure out where the money is going,' she adds.
Now that you know about these budgeting blunders, avoid them at all costs so you won't find yourself in a cash crisis.
PS: If you need information on budgeting, checkout the Master Budget Series.