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Updated 20 Oct 2020

10 Budgeting mistakes to avoid

Budgeting is a great tool to empower your business. Done wisely it will give you tremendous control, flexibility and foresight. Done badly, however, it could lead to all sorts of problems.

02 April 2012  Share  0 comments  Print

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Here are the 10 most common - and easily avoided - budgeting mistakes.

1. Unrealistic expectations

Being positive is one thing, being unrealistic is quite another. A falsely reflecting budget that overestimates your sales or underestimates your immediate financial needs could trip you up when asking for funding, and severely blur your view of the future of your business. Remember, you won't be fooling anyone but yourself.

2. The wrong tools for the job

There is no one-size-fits-all budgeting solution, even for small businesses. Some people can't get past pen and paper; some feel comfortable with spreadsheets; while others prefer finance software packages. Find what works for you and your particular business. As long as it's easily updatable and accurate, that's all you need.

3. Not enough detail

Don't skimp on the information you include. Small amounts here and there all mount up, especially if they are regular expenditures. These are the hidden "killers" that can create big losses for a company. Be thorough in your budgeting or your figures won't add up.

4. Excluding key people

Unless you are a sole proprietor, failure to consult key staff members is a shortsighted and expensive mistake. Get the right people involved from the start, particularly those with financial, sales and production responsibilities.

5. Looking back

While previous income and expenditure should be taken into account when building a budget, it must also work hand in hand with current and future considerations.

The current economic climate and all the aspects that feed into it are completely different from even a year or two ago, and you should adjust your sales and expenditure estimates accordingly.

6. No contingency money

Running a business to the wire is not only stressful, it also means you are one (even small) emergency away from bankruptcy. A contingency fund is essential to meet any unexpected expenses. It may mean reducing your profits (or even your salary) to create this slush fund, but this resource could be the difference between success and failure.

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During the course of running and growing your business, you will need access to both short-term and long-term cash savings to pay salaries, suppliers, or even to save for a future project or large payment. Standard Bank provides a range of flexible Savings and Investment solutions, with competitive interest rates, to help you meet your business’s savings and investment needs.

7. Seasonal sales

If part or all of your business is driven by seasonal sales, this must be factored into your budget. Sales in the high season will have to cover the lack of sales in the low season.

This will affect many other aspects of your variable expenditure, such as labour and production, yet your fixed expenditure will remain all year through. Accommodating this in your budget is essential for successful planning.

8. Sales don't always equal cash flow

Just because you are hitting your sales targets does not necessarily mean that you have a positive cash flow. While some industries, such as retailers and service industries, work on immediate payment, others work on 30, 60 and even 120 day payment terms. If you do not factor these timings into your budget you could suddenly find that you have sold all your stock but have no money in the bank.

9. Forgetting taxes

Failure to budget for SARS' portion of your income will get you into financial and legal hot water. Always clearly factor in forecasted tax (and VAT, if registered) payments on all sources of revenue.

10. Keeping it in the drawer

It is not enough just to draw up a thorough budget - you have to use it. Refer to it monthly, as least. Check if you are operating against your budgeted figures. If not, find out why. If sales are better than expected - great! If you are losing money, work out fro

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