We often hear that failing to plan is planning to fail. Budgeting is essentially a form financial planning and it should be a good way to prevent financial issues. With well-planned budget, we should be able to use and collect information about daily functions of our business. Budgeting should also help us spot problems that can derail our business plans.
However, there are actually some budgeting mistakes that can make the situation worse for us.
- We don’t see budgeting as essential: This could be seen as the cardinal error in budgeting and it could be the single reason why people don’t make proper budgeting. In this case, we could record actual expenditure and revenue. Our very early budget could quite simple, with only list of expenses and income. However, we will eventually find ways to expand our budget and we will eventually have a quite comprehensive model that allows us to make accurate financial projections.
- We don’t forecast revenue: Revenue is a critical part of budgeting and we should be able to predict it. We should make projection regarding the revenue we hope to obtain. This prediction should help us to find out whether we can cover expenditures and how much we can save. Without forecasting revenue, we won’t be able to make proper financial planning. In this case, we should pay a close attention to historical data and forecast realistic revenue. However, we shouldn’t make another mistake of overestimating our future revenue, because this could cause future problems.
- We don’t prepare working papers: Working papers should contain detailed information on cash flow projections based on specific calculations. This could mean that each item in the list is properly budgeted. This should help us make a prediction of revenue and expenses for each item. This should provide us with a more comprehensive overview of our forecast. Eventually, when we need to review our budget, it could be an excellent source of information. As an example, we could find out what’s wrong if our revenue calculations seem to be incorrect and have caused specific shortfalls.
- We don’t expect variance: There are always variance between our budget and our actual money condition. By expecting variances, we should be able to compensate and act on them regularly. To deal with variances, we should have a clear list of each item and continuously look for discrepancies between our budget and our real financial situation. It should be noted that variances can be either negative or positive. We should always make sure that these differences will help us to update our budgets.
- We don’t prepare an action list: We should compare our actual finances and our budget, which is essentially a prediction of our future financial situation. There should be a list of actions that could allow us to deal even with the most severe variances.
In the end, we should be able to create a budget report and such a document is essential, even if we only perform household budgeting.