How do you create a budget for your small business? Owning a small business can be an extremely challenging task, particularly if you’re a new business owner. For many in this situation, your experience in setting budgets is limited to household and personal budgets, with significantly fewer variable costs and different factors involved. So how can you ensure that you’re covering all bases when it comes to your small business budget?
We’ve created a list of five common mistakes that Australian small business owners make when it comes to budgeting. Keep these in mind as you begin your budgets, and take precautionary measures to avoid them.
1) You make unrealistic projections
Creating unrealistic projections for the financial side of your business can go both ways. Most often, a business will make projections for their business that are too optimistic. This may allow them to secure investors in the short term, but will ultimately lead to them disappointing and upsetting these investors in the long term.
Similarly, a business can create financial projections that are too pessimistic. For example, you may have to create a projection of your cash flow to secure a bank loan, and if you don’t understand the true trajectory of your business you will miss out on this opportunity for growth.
2) You forget about the little stuff
When creating a budget for your business it’s easy to list off the obvious big-ticket items: rent, staff wages, insurance, etc. But what about those smaller items that continue to add up over time?
For example, say at your business you offer to buy your clients a coffee from the next-door café when they come for appointments. If your business receives 5 appointments a day, with an average cost of $4 a coffee, all of a sudden you are spending $20 a day, or $100 a week on something you barely put any thought to.
When creating a budget for your small business, it’s essential that you are extremely detailed. Keeping receipts is an easy way to make sure that no expense goes unnoticed, allowing you to improve your processes where possible.
3) You forget about the big stuff
If you’re a small business owner, you’ll need to set aside a percentage of your earnings for income tax. An extremely common mistake for Australian businesses is allocating too little for tax, and failing to realise until tax bills are due.
Budgeting inadequately for tax payments can be a serious problem for small businesses. In the most extreme circumstances, the Australian Tax Office (ATO) can take legal action, which could force you to close your business to recover unpaid tax. For this reason it’s important to keep tax in mind constantly throughout the process of budgeting.
Remember also to consider your Goods and Services Tax (GST), as you’ll need to set aside money for this too. Is GST incorporated into the advertised prices of your products and services? Do you communicate clearly with your customers about the presence of GST, or lack thereof, in your quotes?
4) You disregard cashflow
Many Australian small businesses run into trouble because they spend money that they don’t yet have, and this occurs because of a misunderstanding of cashflow. Often business owners equate finalising a transaction agreement to money in the bank, when in reality there will always be a delay between these two times.
Having a clear and accurate depiction of your business’ cashflow is essential to budgeting for your business, as it allows you to know what you’re working with. Knowing when your cash flow surges and dips will give you insight about when to time the expenses in your budget to ensure that your business stays afloat.
5) You neglect to consider time as a resource
When you run your own business, it’s inevitable that it will consume a lot of your time, and if you’re passionate about what you do, you’ll usually be more than happy to spend this time.
It’s important to keep in mind that your time is a resource, and it too should be budgeted for and tracked. If you don’t give time allocations to tasks, you can find yourself focused on unimportant jobs in the scheme of things, and neglecting jobs of high impact to the business. As the adage goes, time is money and money is time. Your time and the time of your staff have monetary value and need to be considered accordingly.
If your small business struggles with budgeting, why not try out Reep? Our helicopter view of your financial data gives you a real-time view of your budgets and cash flow.