Common pitfalls to avoid when budgeting

Some start-ups fail in the first year of trading because they are unsure about budgeting and cashflow. Another problem some businesses face is that they have ample cash but are allocating it to all the wrong places, meaning it is being used poorly and not working for the business.

However, planning what to budget and where can be tricky in a new business where you have no proof of what works and what doesn't. How can you plan and budget when you don't realistically know what to expect for your money? These five tips can help you get your budget on track and keep your cashflow working for you.

1. Not being strategic

Whereas some business start with nothing in the hopes of building up, others start with investment and hope to keep it going. Whichever business you are, if you fail to be strategic then you can lose track of where you are and what you need.

Take the example of a new graphic design business starting with the help of investment. The business could easily get carried away spending all the money they have received. Spending it on things like a state of the art office facility, new equipment and hiring employees. But what they're not taking into account is the ongoing costs of spending in this way. What happens in a month or two when the investment money has run out? Are they going to be able to stand on their own two feet, or will they need to look for additional support?

The solution to this is simple - you need to plan ahead and strategise. Look at the long term and don't get overly excited when any investment money hits your bank. Think of the long-term and how you can utilise the money in a smart way.

2. Underestimating the initial costs of starting up

The business has started and has clients on the books that it's doing work for, this is a good start. But the business has to put money out on things like equipment, and staffing. Whereas the money coming in from the work it's doing may not hit the bank for 30, 60 or even 90 days from date of completion of the job. Or what if the business doesn't have an immediate clients? Will it still be able to survive?

What new business owners need to think about is the fact that any payments coming into the business may be a long way off yet. So they should budget for the most important items and stay strict with any spending so that they do not blow through all of the cash within the business.

For example, the business may have factored in getting money from clients in month three of trading, in which case they will have to factor in three months worth of wages, rent and other office costs. But what happens if they don't get the money until month four or five? Will the business be able to survive?

The main solution to this is to plan out meticulously, and look for additional investment if needed. It's good if the business has high hopes of having clients paying when expected but you should still hope for the best but plan for the worst.

3. Underestimating ongoing costs

Do you know how much money is needed on a month-to-month basis in order to keep your business going? This is an area that some businesses fail on. They manage to factor in the large costs such as rent and staff wages, but can forget about things like the phone line, broadband, insurance and stationary. These small costs can soon add up.

This risk can be minimised with careful planning, take a look at everything in your business and everything you are planning to accomplish, what costs are involved; can any of these be reduced? Have you taken every little detail and cost into account?

4. Setting the wrong prices

Have you ever felt like you're undercutting yourself for a product or service that you provide? Most businesses look at what their costs are for providing the product or service and then just add a bit on top. This may work for some but it can be hard to factor in everything.

Take a look at the following example, you're selling handmade products and have calculated the cost of raw materials, factored in the time it takes to make the products and have added on a little more in order to make a profit. But, you've forgotten about the time taken to package the products, the cost of shipping and any time spent queueing at the post office, and that's without the need to deal with customer enquiries.

A way you can help this is by taking into account the time and resources you will be using in the rest of your business, not just what you're producing. Also look at the quality of the products you're making or the services you're offering, people are more likely to pay more for high quality items.

5. No contingency plan

How would you cope if something went wrong? When you're starting a business it can be fast paced and ever changing. But what happens if your brand doesn't take off or a client decides not to use your services and go elsewhere? Your business needs to have plans in place for if the unexpected happens, such as a fault in one of your products meaning it's going to require further development.

Take the example of a digital marketing agency, some clients may come to them expecting immediate results, but due to the nature of online marketing it can take months for results to become apparent. During this time, the client could become impatient and move to another provider.

There are only two real ways that you can prepare for this:

1. Give your client realistic time frames - also try to take into account any problems with the product / service which could delay it
2. Give your client realistic expectations - don't promise them the world and deliver a stone

Also think about having some emergency cash set aside in the business so you can dip into it if something doesn't turn out how you would expect.

Conclusion

Starting out in business can be tricky and cashflow can seem like it's only going one way, but with the right plans in place and budgeting for everything, you can help to make your business a success.

This post should be used as guidance only. Advice should be sought from your accountant if you're unsure.

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