5 Business Budgeting Myths Holding You Back
Have you ever wondered if things would be easier if you just had a budget? Or you have a budget for your business but it’s so tough to stick to it? Do spreadsheets terrify you? I’ve been there. Although I’m a “numbers” person (i.e., I geek out on Excel), I’ve had my moments when the thought of making a budget terrifies me, no matter how many business budgeting tips I know.
Sometimes I’m tired and dread the time and energy I think is required to create a budget. Other times I’m worried having a budget will hold me back from jumping on opportunities or pivoting in my business. I also stress about sticking to my budget and wonder why bother if it’s not going to keep me on track. In my worst moments, I feel defeated because I have no clue what my revenues for the year will be so I figure there’s no point in even trying to guess.
The Skinny on Budgeting
But here’s the thing about budgeting – it doesn’t have to be hard, time-consuming or an inevitable failure. Too many people see budgeting as a boring, burdensome activity that leaves you with a plan you’re doomed to ignore or fall short of.
Instead, try to see budgeting as a road map. Ever been on a road trip without GPS? It’s no fun, right? But when you have directions, it’s a lot easier to get where you’re going. You won’t be wasting gas, time, or get lost in the middle of nowhere. And here’s the thing about directions – they don’t stop you from making that unplanned stop for slushies or to see the biggest cotton ball in the world, do they? NO! Directions are merely a guide to save you time and get you where you need to go.
Budgets are the same thing. When used correctly, they act as a guide to take your best-laid plans and intentions. They pave a path to achieve your goals and dreams. They still work even if you don’t follow them exactly.
So to reframe our attitudes towards budgets and use them to benefit our businesses, let’s start with some of the most popular business budgeting myths that are holding us back.
Myth #1: Budgets are confusing and complicated
While I’ve definitely seen budgets that would make your head hurt, budgets don’t need to be complicated. Did you know that there are many different formulas to creating budgets out there? Which one you choose depends on your business model and your personality type. Here are a few popular ones:
Pay Yourself First Method:
How it works: Before you allocate funds to any other categories, budget to pay yourself first. This should include a percentage of your revenues to profit first, and then a percentage (or amount) for your salary. Everything left can be used to pay for regular expenses.
Who this is best for: People focused on the big-picture. Those who have had trouble sticking to budgets in the past.
80/20 Budget:
How it works: Allocate 20% of your revenues to savings/profits and put the remaining 80% towards your other expenses.
Who this is best for: You’re not great at tracking your expenses and need a simple budget focused to help you start budgeting and building up your business’ financial cushion.
50/30/20 Budget:
How it works: Allocate 50% of your revenues to operating expenses. hings like owner’s pay, rent, subscriptions to your email marketing provider, website host, etc. Then 30% should go towards taxes. The remaining 20% is your profit. It can be reinvested, put into savings, or used for debt repayment.
Who this is best for: Someone who is more disciplined about keeping expenses to the budgeted amount.
You don’t have to choose one of the above methods; these are simply options to get started. Bottomline, your business budget should make sense for your situation and your habits. If you are new to budgets and not so great at tracking expenses, a simpler method like pay yourself first or 80/20 may be the best way to start out. If you’re more diligent about tracking your expenses and confident you can keep those in control, the 50/30/20 budget may make sense for you.
Myth #2: It takes a lot of time to create a budget.
If you’re already tracking the money in your business (via an accounting software), then creating a budget shouldn’t take more than an hour. Even if you aren’t, creating a budget isn’t that time consuming as long as you can easily access details on your revenues and expenses.
To create your budget, start by looking at your revenues and expenses over the last few years (or as far back as you have if your business is newer). Look for trends – how much have your revenues increased each year? Use this growth rate to calculate your expected revenues for the coming year. Factor in any changes you might make to your business model. For your expenses, make a list of everything you spend money on in your business each month. A quick way to do this is to peruse your credit card or bank statements for the past few months. I like to add a cushion to my budgeted expenses (usually 5-10%) just in case I have unexpected bills.
Once you’ve outlined your expected revenues and expenses, review your numbers to see if any changes are required. Using the budget method you’ve decided on in #1 above, identify any problem areas (are you paying yourself? Have you budgeted for taxes?) and adjust as needed.
If you budget (no pun intended) 1-2 hours each quarter to create your budget and 30 minutes every month to review your actual numbers compared to your budget, you’ll be well on your way to mastering the budget in your business.
Myth #3: Budgets are too restrictive.
In an ideal world, you’d do everything according to your budget. But we don’t live in an ideal world and things in business rarely go according to plan. So if you’ve been resisting having a budget because you’re afraid it will tie your hands, let’s throw that myth out right now.
Remember my road trip example? Your budget is simply a guide. Budgets are meant to be flexible. The goal is not to get caught up in the numbers but think about the bigger picture. If your revenues are down one month or your expenses are up, look at other areas where you can bring in more money or reduce expenses.
Also, when you first start budgeting, it will take some time to really understand your earning and spending patterns, too. It’s not unusual to need some tweaking as you’re learning your numbers.
Myth #4: It’s impossible to stick to a budget.
I know the feeling. For so many years I felt like a failure as I blew through every budget I created for my business. That is, until I realized that the myths above were holding me back. I needed to view my budget as a resource and a guide, and not an exam that I was failing.
As previously discussed, you need to choose a budget formula that works for you and your business, and even then it’s okay to be off on some of your estimates. The more you learn about the numbers in your business, the better you will get at creating your budgets.
If you start to view your budget as the resource and roadmap that it is, you will soon realize that the point isn’t to stick to the budget. The point is to use the budget as an outline for decisions you make in your business, but not to punish yourself for not hitting every number on the head.
Myth #5: There’s no point in creating a budget. My business is new and I have no clue how much money I will make.
One of the most challenging things in creating a budget is having little to no data to work with. When you’re just starting out, or launching a new revenue line, it can feel nearly impossible to estimate what your revenues will be.
Here’s how I approach the first year in business. Instead of starting with your revenues (as you will likely do in future years), start with your expenses. Be mindful of the fact that it’s your first year so try to keep your expenses as low as possible. Write down everything you’ll need to spend money on to keep your business afloat. Then, calculate what you want to pay yourself, based on the time you’ll put in and the going rate for that work in your industry. Make sure to calculate a reserve for taxes and ideally, a small reserve for savings (understandably, it may be very small in your first year of business). This will give you two thresholds – the first, is just your expenses + taxes. The second adds on what you will pay yourself plus the reserve for savings.
These two thresholds serve as your “bare minimum” and “ideal” revenue amounts for your first year. Once you’ve calculated those, do a gut check to make sure these make sense. For example, if you know that the average conversion rate in your industry is 10% (meaning 10% of interested people actually purchase), make sure you can obtain your estimate revenue amount given the number of people you have on your email list or in your sales pipeline, given the average conversion rate and the price of your product/service.
Once you start to earn money and have more data to go on, you can adjust your budget accordingly. In the first two years of business, I recommend having monthly budget updates to ensure your budget is adjusted to suit the reality of your business.
The Takeaway
Having a solid budget is one of the most important resources in your business. However, creating one can be one of the most intimidating things to business owners who are not Excel-nerds like I am. By debunking some of the most common business budgeting myths, I hope to shift your attitude around budgets so that they can be useful to you in your business. Once you go from seeing the business budget as an overly cumbersome, complicated and restrictive test that you will inevitably fail to a practical resource and roadmap that will guide you in your business decisions, you’ll see the benefits of having a strong budget in your business far outweigh the minimal time and effort required to put one together.