Budgeting Mistakes

Budgeting mistakes can be deadly. Avoid these budgeting mistakes at all costs.

Wouldn't it be horrible if you did everything right to set your small business on the path to success,
but a few budgeting mistakes ultimately lead to your downfall?

Here's a list of budgeting mistakes and budgeting tips to review before you start your businesses budgeting process.

• No Budgeting. The biggest budgeting mistake for businesses is not to do it at all. It's like driving a car when you can only see two feet ahead of your front bumper. Bills are coming in, checks are coming - and there's a chronic mode of juggling one against the other with no sense of overall profitability or predictability of the future.
• No Business Plan. Budgeting needs to be done to support the business plan. I've seen numerous people work through their budgets and never tie the expenditures to business goals. The first step in budgeting is to develop a three-year business plan for the business. If you don't have a business plan, there's very little value in going through a budgeting exercise.
• Question Every Expense. Small businesses cannot afford to waste money. If you are paying $500 for website hosting, it's time to look into whether a $100-a-year service might give you the same result. Budgeting is a great time to look at what costs can be eliminated if you bought it last year, it doesn't mean you have to buy it this year.
• Ignoring Cash Flow Considerations. Many businesses budget for projected expenses but don't tie that expense budget into their revenue projections. If you only focus on expenses and ignore revenues, you can't project future cash flow. That's a disaster waiting to happen. You can be following your budget to the tee and suddenly find you've got no money in the bank to pay your bills.
• Don't Get Too Granular. If you are new to the budgeting process, it's tempting to build line items for every single expense in the company. The problem is the budget can quickly get large and unwieldy. Keep it simple. A budgetary line item for "office supplies" is just fine - no need to budget for pens, pencils, paper and paperclips.
• Watch for Spreadsheet Errors. More than a few businesses have signed off on a budget that rolls up all of their expenses only to find out months later that there was a spreadsheet error. Double check all your formulas. When you're done double-checking, it's time to triple check.
• Starting Too Late. Many businesses start talking in September about next year's budget but don't actually get around to doing it until December. In that situation, you use the third draft of the budget when you should have gone through ten revisions to get a solid product.
• Failure to Systematize Budgeting. If you've gotten to a certain size of business and don't have written instructions on your budgeting presses, stop the assembly lines and take a time out. Get those processes in place so that every year everyone knows what's expected of them and how the budgeting process will play out.
• Monitoring the Budget. If you don't compare to accruals and revise it frequently, you are missing the point of budgeting. Budgeting should be more like clay than cement. Flexibility has to be built into the process.
• Pareto Principle is Key. Focus on the things that really matter. The budget should illuminate profitability and business strategy issues. Don't spend an equal amount of time on every item. Spend the most time on those line items that drive profitability.
• Choosing the Wrong Crew. Some businesses make the mistake of having closed-door budgeting sessions that only involve company bigwigs. Not involving the right people is a big mistake. For example, if you don't get input from the people on the front lines, you might never know that an expensive piece of machinery is on the verge of breaking down.
•  Financial Systems. As businesses grow, they need to evolve beyond spreadsheet-based budgeting. Financial systems are not in place to efficiently do budgeting. A mass of budgeting spreadsheets circulating around via email can be a recipe for a disaster. If you don't have good financial systems in place, it's time to add a new budgeting line item - Buy New Financial Systems.
• Use the Budget to Define Incentives. Business owners should view the budgeting exercise as an opportunity to define incentives. One business owner I know creates an EBITDA bonus pool. If the company hits its EBITDA target, everyone shares in the bonuses. That sort of program ensures that you'll follow the budgets and that the budgeting exercises directly contributes to the healthy growth of the business.
• Failure to Test Assumptions. Whether your business is large or small, the budgeting process needs a devil's advocate who questions every major assumption. Will gas cost $2.50 a gallon or will it cost $3.50 a gallon next year. For a trucking company, that variability could have a huge effect on profitability and even business viability. So, be sure to question your assumptions and do some sensitivity analysis.

Budgeting for Small Businesses
 
 
Wondering how to prepare a budget for your small business?

Budgeting is critical in business no matter what size your business is.

Budgeting is an important and necessary part of any business ownership.

To begin with, lenders and investors are going to require a budget before they agree to partner with your company.
More importantly, a budget can be a valuable tool to help you meet goals and stay abreast of the financial condition
of your business.
A budget is really just a financial plan. It can be as simple or as complex as you want it to be,
although a certain level of detail is necessary if it is going to be effective. With that in mind,
here are some tips to help you get started.

Do a Reality Check

A budget is not something that is pulled out thin air.

It has to be based on figures that can be supported by reasonable expectations.
Those expectations are based on a combination of prior financial performance and anticipated business growth (or reduction).

To gather the information a business will need, you're going to need an accountant that should be able to provide baseline
figures from prior financial periods and can provide a reality check about anticipated sales and expenses.

Specify a Timeframe

Budgets are prepared for a specific time period in the life of your business.
They are often based on an organization's fiscal year, but you may also want to budget on a monthly,
quarterly, or semi-annual basis.

Even if you prepare a budget based on your fiscal year, you should seriously think about breaking it down
on a month by month basis. Most financial software programs make this easy by offering a variety of formatting options
for the same budget.

Estimate Income and Expenses

In its simplest form, a businesses budget will be an estimated plan of your income and expenses for the specified timeframe. For a cash-basis budget, income will include any payments you receive from sales, accounts receivable, interest, dividends, or virtually any other source.
Expenses, on the other hand, represent funds that leave your business to pay for raw materials, payroll, administration,
real estate costs, utilities - the list goes on and on. No matter how carefully you plan, you will undoubtedly encounter
some unexpected costs along the way, so try to leave room for them in the budget.

It's also a good idea to consider when income and expenses will be incurred.
For example, if you operate a paving business almost all of your income will be received during the summer months.
So budgeting your annual income evenly over twelve months would not accurately reflect your situation.
A much better approach would be to budget the income for the months you actually expect to receive it.

Why we can do it and still save you money
 
80% of the bookkeeping task in a typical business is rote entry. The people that do this typically cost $15+ an hour, plus the overhead cost and management cost.

20% of the bookkeeping task requires a true knowledge of the bookkeeping cycle; these people cost $65 to $100 per hour. They can spot errors, deliver meaningful financial reports, and help you build cash flow.

The problem starts when businesses hire the “80% type” people and cross their fingers and hope for the best. Soon, the numbers can’t be trusted and owners fin themselves using the “Cash on Hand” accounting. This means running a business using anecdote and feelings rather than the facts. What follows? Cash flow problems, extra work hours, and more debt.

We can do this at less cost since we hire, manage, and deliver the appropriate skill for each task. You don’t need to hire a $70,000.00 per year CFO, but you could have access to one only when you need them. No management time or costs is spent on the bookkeeping position. Our use of technology eliminates a huge amount of wasted time in a traditional on site bookkeeping function.  

Given the amount of resistance to change that settles in after you've selected an accountant, it's important to make a good choice the first go-around. Makes sense, right?

Surprisingly, most business owners don't thoroughly consider their industry needs when selecting an accountant. That's because many of us who don't have a strong accounting background view all accountants as being equal.

But the reality is that all small business accountants are not created equal.

Small Business Accountants can assist your business and provides useful questions you should use to choose an accountant that truly can help your business grow, not somebody who just crunches the numbers or puts the right numbers in the right boxes on the right tax forms. 
What Do Small Business Accountants Do Anyway?

The increasing role of small businesses in the American business landscape and along with the more powerful and accessible information technology has changed the role and importance of the small business accountant.

Why do you need an accountant? Some contracting businesses make due with a bookkeeper this person is sometimes a family member or spouse - someone to perform the tedious task of recording financial information and cranking that data into the necessary formats, like P&L statements and tax forms.
But a good small business accountant does much more than just record transactions and passively generates documents-they actively analyze, interpret and convert that data into actionable business intelligence.

Based on where you want to go with your business, they should be able to tell you how to get there. If your accountant is just showing you the financial tracks of where you have been, you've made a bad choice and you're missing out on a great opportunity to receive good business advice.

To be sure, today's contracting business accountant offers more than crunched numbers. They can be your primary resource for:

• Tax Planning. Beyond simply preparing tax forms, an accountant should be involved in business planning throughout the year. They should be able to regularly advise the business so it functions with peak tax efficiency.
• Business Consulting. A good accountant should be able to help your business grow. Talented small business contractor accountants function as a trusted general business consultant, assessing business problems and offering specific solutions. They offer advice on internal controls, risk management, lease versus buy decisions, inventory strategy, pricing, and even marketing. In short, an accounting professional who really understands your business from the inside out should be a trusted business advisor who is highly motivated to see you succeed.
• Personal Finance Advice. A good small business accountant understands that your personal finances are essentially linked to your business finances. They view the two holistically and offer advice on both fronts. For example, while serving as your small business accountant, they might offer retirement planning advice and estate planning advice that is related to your business activities but that will ultimately leave you in a stronger financial position.
• Technology Know-How. Computing technology has dramatically improved business capabilities as powerful business software is no longer only for corporations and the Internet provides a level of access to knowledge, customers and suppliers hardly dreamed of even ten years ago. A good accountant must -- must! -- Absolutely be proficient in applying the fantastic and inexpensive information technology that turns business data into strategic intelligence. They need to be very familiar with leading small business management software packages from leading vendors like, Intuit and QuickBooks.
• Networking. While the strength of an accountant is still what they know, a mark of a successful pro is also who they know. Your accountant should be a good source of referrals as they should now precisely each of their clients' strengths and needs. Need to get a loan for your small business? Your accountant ought to be able to introduce you to the right banker.

Questions to Ask Your Prospective Accountant

The bottom line is that you should expect today's accountant to be much more than a bookkeeper. Most do add considerable value. The trick is to separate the wheat from the chaff.

So, with your raised expectations, how do you choose the right accountant for your contracting business? Like any relationship, it boils down to a compatibility of interests, experience and outlooks. Seek recommendations from your peers and ask prospective accountants the following questions:

• Do you have your CPA? Business owners are often confused as to the certified public accountant (CPA) designation. A CPA has a surpassed accepted financial education levels, passed state-administered tests to prove competency and periodic re-certification exams. Certain situations, such as audits and many loan applications, require CPA involvement. What kind of creative business advice will you offer me? A good accountant can skillfully handle data and numbers but should also be able to demonstrate quick and creative business insight. Ask them for some examples in which they offered useful business advice to other clients in a similar industry that went beyond just tracking the numbers. While "creative accounting" is usually a negative, having a creative business mind can be a huge asset towards helping your company to grow.
• Who are your other clients? Imagine this scenario. You hire an accountant based on the assumption that he understands the basics of your business. Then, you find out that he's never had a client like you before. Instead, he's only prepared tax forms for wealthy individuals that don't own businesses. Avoid that possible disaster by asking who the accountant works with. If they are businesses that are similar to yours, that's a good sign. In asking about their clients, you will also want to understand how busy they are and whether they have the time and resources to support you adequately.
• How do you calculate your fees? Ask the accountant what you can expect fees to be and will he guarantee that you will not exceed certain amounts that you agree upon up front. In a time-based fee structure, make sure to find out the hourly rate, as well as all fees for expense reimbursement. Find out now whether a simple two-minute phone call or a one page fax means an hour of billable time. If that's the case, run for the door.
• Are you active in the local business community? Who do you know that can help me? Find out whether your prospective accountant can introduce you to people who might be useful to you, including prospective customers, suppliers, bankers, and investors. Since talk is cheap, take it one step further. Ask the accountant for examples of introductions they've made in the past for other clients and how those introductions played out.
• Why should I use you? As a final question, it's always good to let the accountant make the case for why you should engage them.

Transition Process

There are lots of other accountant firms to choose from. To be frank – not all of them are what they claim to be. Very few offer the level of service that we pride ourselves in delivering to our clients.

Our experience and testimonials has shown that many business owners become fed up with the level of service they get – or rather don’t get from their accountants. Even still they fell unable to make the move because they are worried that there will be all sorts of complications with the transition process. Well, don’t worry because we can make that transition easy for you. Some are nervous about telling their accountant that they are moving. We understand and want to help smooth that process for you.

If you want to change your accountant our team will work with you to make sure that the transfer can happen with little interference and disruption. 


Choose the right accountant the first time around

Accountants have to develop detailed knowledge of your business in order to their job.

However, this makes the move to a new accountant much harder. It’s worthwhile to spend a lot of time making sure that an accountant is right for you. Don’t be afraid to ask your prospective accountant for a free preliminary interview. Ask where they went to school, if they participate in continuing education and if they have partners that assist during tax season and if they are reliable after the deadline.

Good accountants will have references and good standing with the Better Business Bureau, Chamber of Commerce and the local banking community. Also, they should have clients in your industry such as contracting. You should make sure that you are personally comfortable with this person because you will entrust your personal financial information to this person.

Does my accountant need to be a CPA?

Absolutely! There are more than a few accountants and bookkeepers that set up shop without any kind of certification or knowledge of your company’s industry. They may be a little cheaper, but if they screw up, you are responsible. So, for instance, if your uncertified accountant gives you the wrong information, the IRS will be talking to you not the accountant. Is that a liability that you want? Certified Public Accountants or CPA’s are held to a higher standard, require continuing education to stay up to date on current tax law, and are a safer bet and a wise investment for your business.

The Hassle

• Is your bookkeeping behind and affecting cash flow?
• Is your business unfocused and not producing enough income?
• Are you doing the books and finding it counterproductive?
• Is your spouse or office manager stuck with the task and isn’t up to it or has other duties?
• Would you like to spend more time selling and prospecting new business and not hassle with the bookkeeping?

The Benefits

• You have accurate numbers ALL the time - you can use them to make good decisions for your business.
• You can focus on your business and add value to your clients and services - do what you do best and let us do what we do best.
• You won't continually hire or manage a bookkeeper - freeing you up to concentrate on your customers, vendors and employees. No more management time spent on the bookkeeping position.
• You ALWAYS have 100% control - only you can sign checks.

The Payoff

You always have up to the minute, accurate data to make to plan and make decisions. Your bank account will show the right balance and your expenses will be properly categorized to give you management information.

On a daily basis, you will be able to spend 5 minutes reviewing reports that show the critical numbers in your business. 

We strongly believe in the 80/20 rule of business. Included will be a monthly phone conference with "your CFO" to review business results and coach you to make sure you are focusing on the activities that truly drive profit, cash flow and growth.


How we do it

• An experienced (15+ year’s minimum) accountant prepares your books.
• Source documents such as invoices, check stubs, etc, are faxed to our office or mailed directly to us.
• We access your QuickBooks file remotely using a variety of secure options. You also have complete access to your QuickBooks file 24/7, and maintain complete and total control.
• Online banking is used to improve cash management.
• Inefficiencies are dropped from the bookkeeping function.
• We will revamp your chart of accounts to make your expense categories more detailed and meaningful.

Getting up to speed on small business accounting?

Accounting isn't the most glamorous part of running a small business.

Most business owners  would rather spend their time managing the jobs, giving bids or proposals, and growing their client base. But accounting is important.

Without it, your business will never reach its full potential. A lack of adequate accounting could even create serious legal problems that could easily have been avoided.

The purpose of accounting is two-fold:

• First, a basic small business accounting system generates a record of the receipts and expenditures of your business' day to day activities. This data is vital for the completion of your annual tax returns and other legal documents. It will also be required by lenders when you apply for a small business loan.
• Second, valuable business accounting provides you - the entrepreneur - with a valuable tool for assessing and analyzing your business' performance. With just a little practice, you will begin to notice trends that highlight your business' strengths and weaknesses. This information will help you make informed decisions about how to improve your bottom line.

The good news is that legally you are not required to maintain your financial records in any specific manner, as long as the records accurately reflect your business' income and expenses. Most contractors maintain their records in a ledger, which is simply a record of sales receipts and expenditures.

The process of transferring individual receipts and expenditures to a ledger is called posting. How often you post to your ledger usually depends on the volume of receipts and expenditures you need to record. Many businesses find it necessary to post to their ledger on a daily basis. However, you should plan to update your ledger on a weekly or at least monthly basis.

Once you have posted your receipts and expenditures to the ledger, you can begin to compile financial reports for your business. The most common types of reports for all businesses are income & expense reports, cash flow reports, and a balance sheet.

The balance sheet is an itemization of your business' assets (cash, inventories, accounts receivables, etc.) and liabilities (loans, debts, accounts payable). If done properly, a good balance sheet will provide an accurate snapshot of where you actually stand because accounts payable and accounts receivable items do not usually show up on in your receipts and expenditures ledger.

In a perfect world, your contracting business would employ a bookkeeper to keep track of your finances. But since most entrepreneurs can't afford to employ a bookkeeper (at least not initially), here are a couple of tips to help take the headache out of doing it yourself.

Tip #1: Consult an accountant. You're probably thinking the last thing you need is another expense. But unless you know how to do income tax reporting yourself, you're going to need to find an accountant eventually anyway. By consulting an accountant to help set up your accounting system, you can save time and money when it comes time to prepare our income taxes, especially if you use the same accountant for both jobs. Plus it’s a great idea to employ one that is familiar with your industry so that your chart of accounts accurately reflects the primary points of your business.


Tip #2: Purchase accounting software. One of the best things you can do for your contracting business is to purchase QuickBooks. There are several affordable programs such as QuickBooks that not only keep track of your receipts and expenditures, but if entered correctly can translate them into quality financial reports as well.