by Nathan Liao, founder of CMA Exam Academy
As an entrepreneur, you likely have a set monthly budget that consists of all of the overhead costs needed to keep your enterprise running smoothly. For example, your budget may include payroll for employees and freelancers, payments for internet service and cloud-based project management software, rent for an office space, etc. It is paramount that you stick to this monthly budget in order to maximize your business’s financial health — if you spend way too much money in a month, it can really hurt your company’s overall profits.
Have you lately been going over your business’s monthly budget and you’re not sure why? Do you want to prevent possible future financial struggles? In my experience as the CEO & founder of CMA Exam Academy, a Certified Management Accountant exam review program, I’ve discovered a number of common ways that business owners unknowingly drain their enterprises’ monthly budgets. Here are just a few of these mistakes to prevent in order to optimize your company’s financial standing and boost your overall business success.
Not Regularly Comparing the Budget to Actual Expenses and Revenue
Oftentimes, business owners don’t maintain a steadfast discipline when it comes to comparing their company’s budget to actual overhead costs and revenue made each month. Whether they’re scrambling to meet project deadlines or rushing to answer urgent emails from clients and employees, their focus is always pulled in so many directions, causing this necessary accounting task to constantly be pushed to the back burner. Don’t make this mistake! It is vital that you take the time to regularly compare your budget to your actual expenses and revenue.
Why is this? Well, it’s because it is easy to completely forget about recurring expenses (like subscriptions to software you stopped using months ago), which will really eat away at the budget. You may also be totally unaware that the monthly fees for internet, utilities, manufacturing, and other operational costs may have increased, which could hurt your bottom line. Therefore, stay disciplined by scheduling a day every month to review your financial statements. Then you can compare budget versus actual expenses, cut unnecessary costs, and make operational changes to ensure you don’t overspend.
Not Pushing Big, Nonessential Expenditures to Later Months with New Budget Cycles
This is a major mistake that so many business owners commit. They will get excited to upgrade their computer, spend thousands of dollars on a new software platform, pay a developer a ton of money to revamp their business website, and make other large-but-nonessential expenditures right away. Don’t also commit this big blunder — it would be in your business’s best interest to always check if a large expenditure is within the current month’s budget, or if it should be pushed to a later month with a new budget cycle.
You can check with your accountant on this, or simply do the aforementioned step and compare your actual expenses to your budget to see if there is enough budget to make the big expenditure during the current month. However, if the expense is essential to keep your business running — for example, if the equipment you use to manufacture products stopped working and must be replaced — then you can make the big purchase right away and adjust the next month’s budget to make up for overspending during the current month.
Pursuing New Projects That Weren’t Budgeted For
How many times have you discovered exciting new marketing strategies, expansion opportunities, sales tactics, and customer service initiatives that you immediately wanted to implement into your own company? A lot of business owners will get amped up about a new project and then make the mistake of pursuing it without considering how it affects other elements of their monthly budget. Even though the project wasn’t budgeted for, they will spend cash in capital expenditures to get it moving forward. This is not a smart move to make in your own enterprise.
If you make the hasty decision to pursue the brand new project or capital expenditure, you will be taking cash away from other items in your budget that were already accounted for. For example, the money you spend on a new customer service initiative can lower the amount of capital that you can put towards your monthly digital marketing strategy or print advertising campaign. This can then mean a possible drop in sales for that month. That said, always think about how one purchase would affect another one in your budget.
Confusing Net Profit with Available Cash
As a certified management accountant, I’ve seen many business owners make the mistake of considering the profit in their Profit & Loss Statement as the basis for how much available “cash” they had in their bank. They would then erroneously make major business decisions based on this figure alone. However, it is so important that all business owners know that net profit does not equal the amount of cash in the bank that is available to spend.
Since cash is typically an organization’s most critical and liquid resource, it has a tremendous effect on liquidity, financial flexibility, and operating capacity. FASB ASC Topic 230, Statement of Cash Flows (formerly SFAS No. 95), states that a statement of cash flows “must report on a company’s cash inflows, cash outflows, and net change in cash from its operating, financing, and investing activities during the accounting period, in a manner that reconciles the beginning and ending cash balances.”
So readers of the cash flow statement can ascertain if the company has generated enough cash (not just net income) to meet all of its obligations. The Statement of Cash Flows (SCF) is the report that contains the inflows and outflows of cash during a specified period of time.
To Wrap It All Up
In order to keep your business running smoothly, it is crucial to set and abide by a monthly budget. Avoid unknowingly draining your monthly budget by comparing it to your actual expenses and revenue. Also, if the current month’s budget doesn’t allow for it, push a big, nonessential expenditure to a later month with a new budget cycle. You can also ensure you don’t unknowingly drain your budget by researching how pursuing a brand new project would affect other initiatives that were already budgeted for. Finally, put together a thorough cash flow statement to always stay on top of how much cash is actually available to make purchases.
Nathan Liao is the founder of CMA Exam Academy, a top Certified Management Accountant exam review program. As a CMA and CMA coach, Nathan mentors accounting and finance professionals in over 80 countries to earn their CMA certification in as little as 8 months. The unique review framework in CMA Exam Academy has proven to be the key to his students’ outstanding success in attaining their dream of earning the Certified Management Accountant certification.