12 Common Mistakes to Avoid When Budgeting for Small Businesses

By Greg Grzesiak Greg Grzesiak has been verified by Muck Rack's editorial team
Published on September 21, 2023

To help small business owners avoid common budgeting pitfalls, we asked CEOs and founders to share their experiences and insights. From accounting for irregular expenses to balancing spending in early stages, here are the top twelve budgeting mistakes and how to overcome them, as shared by these seasoned professionals.

  • Account for Irregular Expenses
  • Avoid Overly Optimistic Projections
  • Beware of Overly Ambitious Revenue Goals
  • Budget for Growth with Proper Funding
  • Ensure Departmental Buy-In for Budgeting
  • Prepare for Advertising Leads
  • Overestimate Costs for Unexpected Expenses
  • Invest in Automation for Efficiency
  • Don’t Underestimate Small Expenses
  • Understand Your Finances
  • Skip Over-Inflating Sales Projections
  • Balance Spending in Early Stages

Account for Irregular Expenses

A wide array of financial behaviors in the realm of small businesses has been analyzed. Among these, one particular budgeting mistake consistently emerges as a pain point for many small business owners: the failure to account for irregular or unexpected expenses.

Example: A local boutique cafe that has done its due diligence in budgeting may overlook the annual maintenance of their coffee machines or unexpected ones like a sudden hike in the price of coffee beans due to a global shortage. When these bills roll in, the cafe finds itself in a cash crunch, leading to stress and potential debt accumulation.

Insight: While it’s tempting to budget strictly based on fixed, regular costs, the reality of business is far more unpredictable.

Solution: Setting aside a certain percentage of monthly revenue into a contingency fund is a good practice. This not only prepares the business for unexpected costs but also provides a sense of security and stability.

Zaher Dehni, CEO, Taxfully

Avoid Overly Optimistic Projections

The biggest budgeting mistake new businesses often make is projecting out best-case scenarios, or even good-case scenarios, when putting together their budget. Operating off of a worst-case scenario budget is a more realistic approach. 

Designing a business around a budget where minimal customer traffic is expected, and a higher-than-normal number of things are anticipated to go wrong, allows for these problems and yet still the business can survive. This sets the business up for success. If it can survive worst-case scenarios and has planned for those, then when it outperforms the worst case, great success is achieved.

Customers should not be expected to flock to a new business. Anticipating what is hoped for is not a good strategy. For instance, if starting a lawn service and the goal is to have fifty yards a week, a budget should be designed that survives having only two lawns a week to start with a one-yard week-over-week growth rate. Doubling every week until hitting the fifty should not be expected.

Christopher Olson, CFO, Surfside Services

Beware of Overly Ambitious Revenue Goals

One common budgeting mistake that is often observed among small business owners is over-optimism when projecting revenues and underestimating expenses. There have been instances where entrepreneurs set overly ambitious revenue goals based on optimistic market projections, leading to financial strain when those projections don’t materialize. This can result in insufficient funds to cover essential expenses and investments.

For instance, consider a retail startup that projected high sales volumes without factoring in potential market fluctuations or competitive challenges. As a result, they allocated resources to expansion plans and inventory purchases that were not supported by actual sales figures. When sales fell short of expectations, the business faced liquidity issues and had to make difficult decisions to cut costs, impacting both growth and employee morale.

Sai Blackbyrn, CEO, Coach Foundation

Budget for Growth with Proper Funding

The biggest mistake, according to experience, is budgeting for growth without proper funding. Things often turn out differently than expected. Future revenue takes longer to close. Hired personnel don’t perform as expected. A big client goes to a competitor, among other issues. 

A better rule of thumb is always to have twice the monthly expenses in the bank (don’t include your debtors) and aim for a minimum of 10% net margin (net income/revenue). When you grow to a 15% net margin and have enough cash in the bank, you can make new investments. Yes, growth will be slower, but you are not dependent on luck and will survive in financial hardship.

As a side note, try to be as flexible as possible. That means working with freelancers, outsourcing tasks, and not taking on long contracts. That way, you can adjust when needed (for example, because of losing a big client).

Daniel De Vries, Director, VoucherAlarm.com

Ensure Departmental Buy-In for Budgeting

Budgeting is like flossing; everybody knows they need to do it, but they often neglect it until it causes problems. The biggest mistake we see in small business budgeting is the lack of departmental buy-in required to develop a thorough budget. Budgeting is a team activity. In order to develop a strong and accurate budget, it requires input from key stakeholders from sales, marketing, HR, operations, and other areas of the business.

When pulling in your team to develop your annual budget, make it fun. Don’t just set up a “Budget Meeting” on the calendar—boring! Set up a collaborative exercise to help your team understand the possibilities for the year, the dependencies within the budget, and incentivize the team to put their best foot forward when supporting the budgeting function.

Roman Villard, Founder, Full Send Finance

Prepare for Advertising Leads

In my years of running digital agencies, I’ve observed a critical budgeting error among small business owners: underfunding advertising while needing to prepare for the leads it generates. This creates a firefighting cycle. 

For instance, a client boosted their Google Ads budget but was swamped with leads and needed a plan. This led to stretches of inactivity in marketing, leaving them needing new leads. To avoid this trap, you must plan comprehensively. Allocate not just for advertising but also for what follows, like CRM systems or additional staff. 

Next, maintain a consistent approach to lead generation and marketing. These shouldn’t be sporadic endeavors but ongoing tasks. This ensures not only a steady inflow of potential customers but also the capability to manage and convert them, thereby avoiding the feast-or-famine situation that often hampers small businesses.

Shane Mcevoy, MD, LeadFly

Overestimate Costs for Unexpected Expenses

One of the most common budgeting mistakes small-business owners make is they try to choose a budget that matches the exact cost of their bills and other payments. This is a mistake because, let’s be honest, things rarely work out the way we think they will. You always want to overestimate costs in case something comes up that requires additional funding. 

With over a decade of experience, it’s clear that no amount of planning can prepare you for the unexpected. A moderate buffer will allow you to tackle unforeseen challenges while keeping things orderly and within budget. The general rule of thumb is to estimate an additional 10-15% more than the initial estimate.

Syed  Balkhi, Founder, WPBeginner

Invest in Automation for Efficiency

One prevalent budgeting mistake small-business owners often make is underestimating the significance of automating systems to maximize efficiency. 

Oftentimes, when a small business starts growing, their first thought is to hire someone else to take care of the added workload. In some cases, this may be the right move.

However, it’s imperative that you assess the situation before doing so. You can avoid making this mistake by asking yourself: “Can I automate this process? Or do I really need another human being to do this?” 

Added employees mean added overhead costs. And when you start adding in the cost of salary, paid time off, insurance, and other benefits, automation software comes out cheaper.

An added benefit of investing in automation tools is that you streamline internal workflows, allowing you to do more in less time.

So, before spending more money on additional staff, ensure you’ve done your best in automating and streamlining your business.

Nicholas Robb, Founder, Design Hero

Don’t Underestimate Small Expenses

You’ve taken me on a trip down memory lane! So, back in the early days of my startup journey, we had this thing we called the “Popcorn Incident.” We thought, “Hey, why not provide unlimited free popcorn for the team? Sounds fun, right?” We didn’t factor in just how much our 20-strong team loved popcorn. In just one month, our snack budget had, hilariously, popped through the roof, nearly three times what we’d projected.

So what’s the lesson? It’s easy to underestimate or misjudge expenses, even small ones. For budding entrepreneurs, regularly review your budget, no matter how trivial some expenses may seem. 

Can a popcorn budget break you? No. But it can indicate larger oversight issues. It’s like that saying: “Watch the pennies and the dollars will take care of themselves.” Isn’t it funny how the tiniest kernels can provide the most profound insights?

Ankit Prakash, Founder, Sprout24

Understand Your Finances

One common budgeting mistake I’ve observed among small-business owners is not having a clear understanding of their finances. Some may even avoid looking at their financial statements. However, it’s crucial to regularly review and comprehend your financial data to make informed decisions for your business.

Loren Howard, Founder, Prime Plus Mortgages

Skip Over-Inflating Sales Projections

One of the budgeting blunders I’ve witnessed among fellow small-business owners involves the tendency to over-inflate sales projections. It’s understandable to want to base your sales targets on past performance with a dash of optimism, but this often results in impractical expectations.

To establish more realistic goals, it’s essential to adopt a holistic approach. Consider factors such as market dynamics, competition, and potential expansion into new territories. Your sales objectives should be S.M.A.R.T. (specific, measurable, achievable, realistic, and time-bound).

In addition, I’ve personally discovered the effectiveness of a rolling-forecast method. This approach treats forecasting as an ongoing assessment process. By evaluating the previous quarter’s performance, you can better shape your budget for the future. In a constantly evolving business environment, where economic conditions, market trends, and customer demands are in constant flux, it’s crucial.

Sonu Bubna, Founder, Shopper.com

Balance Spending in Early Stages

One common budgeting mistake I see among small-business owners and startup founders is either overspending or underspending in the early stages. It’s crucial to find a balance in allocating limited funds to areas that will genuinely benefit the user or customer. For example, in the quest for top-tier talent or services, some founders may splurge on expensive resources that don’t necessarily yield a commensurate return on investment. On the flip side, going for the cheapest options can also be detrimental if the quality isn’t there.

To avoid this pitfall, we focus on prioritizing expenditures that will directly improve our product or user experience. When we identify such an area, we look for ‘middle-of-the-road’ resources—those that can do the job well but may not have an extensive client list or portfolio. Gig sites can offer time- and cost-effective solutions, but it’s essential to remember that while good resources are expensive, bad ones can cost you even more in the long run.

Scott Pier, Founder and CEO, Donalo.ai

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By Greg Grzesiak Greg Grzesiak has been verified by Muck Rack's editorial team

Greg Grzesiak is an Entrepreneur-In-Residence and Columnist at Grit Daily. As CEO of Grzesiak Growth LLC, Greg dedicates his time to helping CEOs influencers and entrepreneurs make the appearances that will grow their following in their reach globally. Over the years he has built strong partnerships with high profile educators and influencers in Youtube and traditional finance space. Greg is a University of Florida graduate with years of experience in marketing and journalism.

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