Wells Fargo Small Business Roundup

Success is ultimately determined by the numbers, and a working budget is critical when it comes to understanding where the numbers are taking you. But budgeting mistakes can quickly derail a budget.

Ian Benoliel, CEO of software solutions provider NumberCruncher.com, Inc., has worked with thousands of small businesses in the areas of finance, accounting, and operations. In that time, he's seen owners make a few common, yet easily avoided budgeting errors:

Imagine the Worst When Doing Projections—"The thing we see most often is owners not being conservative enough," he says. "Whether it's on revenue projections or expenses, it makes sense to start with the worst-case scenario. You may think your sales will be great, but you need to account for those slow times for your budget to be realistic. What happens if you have no sales for a few months? What will it take to keep going?" The same can be said for expenses. You know what your rent, salaries, and other fixed expenses are, but you'll always have expenses you're not prepared for. You might add a "miscellaneous" or "other" line item to the budget to handle those unknowns. This is where you really need to be proactive and not reactive.
Take Care with Credit—Whether it's your own credit or credit that you extend to customers, you need to keep a close eye on it. Whenever you sell a product in a non-cash business, for example, you're typically not getting the cash from a sale right away. "Don't assume customers will pay you right away," notes Benoliel. "You need to understand how 30-day, 60-day and 90-day payments affect you, in terms of how you meet your obligations, and build those into your cash flow projections. Until they're collected, having invoices out there isn't the same as having revenue. And you can't spend money you don't have."
Don't Forget the Tax Issues—It may seem like a no-brainer, but it happens all the time. You look at your expanding bank balance with a smile on your face, but you're not accounting for sales tax on revenues and employee withholdings. "Take these costs out of your revenues," Benoliel adds, "or you may end up projecting future revenues you don't have."

The most common mistake of all? "Not doing a budget, which can be the difference between success and failure for any business," observes Benoliel. "The best reason to do a budget is for yourself, not for potential investors. The chief job of a budget is to keep you from running out of money, so it's worth the time and effort to put one together."