20th May 2022

5 Things to Learn From an Incorrect Budget

Jon Dudgeon picture

Jon Dudgeon

Co-Founder and CFO

Preparing for investment can be a pretty daunting, but exciting and very rewarding task if it all goes to plan.

A well thought out budget can really help you understand how your business can get to where it needs to be. When creating a new budget, looking at past situations also helps you to learn from mistakes or triumphs, and consider how you’ll replicate or rectify them in future.

Knowing what you can do without, or makes sense to invest in, is beneficial for all business owners. Even more so for start-ups with a limited amount of cash.

It’s important to remember that you won’t always get your budget right. No one can predict the future, so it is a (educated) guessing game after all! But don’t panic, there are a few things you can learn by getting your budget wrong.

Lesson 1: Know what is realistic for your business

Whilst this may sound a little harsh, it’s a really good lesson to learn!

When you’re just starting out, how do you know what is realistically achievable in your particular business? Exactly. So if you can look back at your budget after year 1 or 2 and clearly flag that you’ve been a little too ambitious, that’s a good thing. You’ll know what is going to be more doable next year.

If your budget was way off and you’ve taken less (or more!) than you thought in certain areas, or maybe overspent on costs in others, look at the bigger picture. Think about why this might have happened and what you need to do to prevent it from happening again.

It could be increased marketing spend to bring in sales, or paying for a monthly subscription annually to make cost savings. Or maybe it’s as simple as reviewing your spending more frequently.

Lesson 2: There will always be unexpected expenses

No one likes to think about unexpected inconveniences, but you shouldn’t bury your head in the sand.

It can be hard to plan for every outcome but setting aside some funds in your budget for any unexpected expenses can be a good way to keep things running smoothly.

Unexpected expenses can include a whole range of unforeseen costs, including:

  • Increased bills
  • Additional taxes
  • Vehicle repairs
  • Lost or damaged stock or equipment

Whilst you may be able to claim through your insurance for some of the above, there may be an excess, or you may have to pay upfront and claim the funds back later.

You never know when something will need to be replaced, when something will be lost or broken.

Lesson 3: Review your budget more often

If your budget was inaccurate, this may be a sign that you need to spend more time reviewing your progress and reflecting in general.

Things change quickly in business, especially in the startup phase.

Ask yourself, did I adjust my budget at all in the last year? If the answer is no, then that might be where you went wrong.

Business events such as receiving funding, employing new team members or relocating are all good reasons to review and adjust your budget.

Lesson 4: You need to spend more time familiarising yourself with your numbers

Your budget may be wrong because you need to spend more time understanding your numbers. Ensure you have a good understanding of your income, expenditure and profit along with the ability to identify trends.

When you’re familiar with your numbers, you’re able to better understand which areas of your business are working well and which may need some improvement. You’ll also be in the know throughout the year, meaning there’s no nasty, sudden surprises at the year end.

Lesson 5: You need to pay closer attention to cash flow

On the surface your business may appear to have made many sales, however payment hasn’t been received prior to expenses leaving your account, which can quickly create many issues for your business.

Spend some time identifying if there’s a gap between when your business is paid and when it pays out. Look at how cash is flowing through your business and if there’s anything you can do to make improvements.

Need help with budgeting?

We’ve been helping business owners with their budgets for years, just give us a shout and we can help you put your next budget together, revisit or review an existing one!