As an entrepreneur, you likely have a set monthly budget that consists 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, rent for office space, etc. It is paramount that you stick to this monthly budget to maximize your business’s financial health.
Have you been going over your business’s monthly budget and you’re not sure why?
Comparing budget to actual expenses and revenue
Often, business owners don’t maintain a steadfast discipline when it comes to comparing their company’s budget to actual overhead costs and revenue 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. It is vital that you take the time to regularly compare your budget to your actual expenses and revenue.
It is easy to forget about recurring expenses (like subscriptions to software you stopped using months ago), which will eat away at the budget. You may also be unaware that the monthly fees for internet, utilities, manufacturing and other operational costs may have increased, which could hurt your bottom line. 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
This is a major mistake that so many business owners commit. They will get excited to upgrade their computers, 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. It would be in your business’ best interest to 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.
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
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 company?
If you make the hasty decision to pursue the 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.
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.
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.
Nathan Liao is the founder of CMA Exam Academy, a top Certified Management Accountant exam review program.