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Budgeting for businesses is a lengthy process that supports an organisation in achieving its goals and realising its vision if done effectively. A business that doesn’t have a budget sets itself up for a host of financial problems later down the track. However, even when you have established a business budget, you’ve most likely dealt with failures at some point. This may be discouraging. Preparation for situations that may cause a well-planned budget to fail is imperative. Here we will explain the question every business owner is asking themselves – Why do Business Budgets Fail?

The Role of Budgeting

Businesses commonly use budgets as a tool to manage company finances. Businesses rely on budgets for identifying current available capital and to provide an estimate of revenue. Accordingly, this will assist the business in better understanding cash flow, where costs can be reduced, and how to increase returns on investment.

Reasons Business Budgets Fail

Inefficient Budgeting Process

Budgeting processes differ for each business. Fixed budgets and rolling budgets are the two most common forms of budgeting a company can employ.

Fixed Budgeting

This is the process of drawing up a budget that covers a fixed period. Once established, you compare quarterly performance to the budget, and the budget remains unmodified. The unchanging nature of this form of budgeting may serve as an impediment to the financial forecasting process. This is owed to the inability to reflect in real-time the business’s financial situation and the unanticipated fluctuations in the market.

Rolling Budgeting

In contrast, rolling budgets take a dynamic approach to budgeting. This involves frequent updates that allow the business to accommodate unforeseen market fluctuations, windfalls and shortfalls. By regularly budgeting and re-budgeting, the business can take advantage of opportunities that were not available when the initial budget was created. In addition to mitigating risks that have become apparent through future projections.

Despite the clear benefits of rolling budgeting, it can be a burden on a business. Therefore, considering your business’s model and needs will assist in determining the budgeting process fit for your business.

Irregular Budget Reviews

A potential reason your business budgeting is failing is that you are not regularly reviewing and adjusting it. The traditional budgeting model involved spending an onerous amount of time creating one budget annually. A budget is not a once-off management tool. Annual budgets can become outdated within a few months, particularly in today’s fast-paced business environment. Budgets can quickly become redundant if the business is spending without checking their budget to ensure they are within their means. Thus, it is essential to regularly review your spending and compare that to your budget projections. Ideally, this will allow you to adjust your following projections in line with your actual spending and goals.

Why Business Budgets Fail

Unrealistic Projections

A common reason business budgets fail is that the business is overly optimistic in the sales and revenue forecasts. You’ve got to be honest with yourself. Going over your budget does not necessarily mean your budget has failed. It may mean you just need a more realistic target. Businesses that operate on an unrealistic budget will easily become disappointed. This is a significant challenge that a business can overcome by analysing your spending over time and being realistic about what your business can practically operate without. Instead, pick targets within your reach. Business budgets that have no leeway make it impossible not to fail.

Lack of Flexibility

Complying with a budget is not a matter of restriction but instead allows you to have complete control over how you will choose to spend your money. Creating a budget is one step closer to financial security. Businesses need to accommodate for expenses that have been overlooked by developing budgets that are flexible. Flexibility involves prioritising expenses and revisiting your budget once every few months. Creating a projection that does not account for unexpected expenses is setting your budget up for failure.

The Budget Is Out of Sync With The Strategic Plan

Traditional budgeting focuses on financial performance rather than the business’s overarching strategic plan. Budgets focused on ‘making the budget numbers’, can result in employees becoming overly preoccupied with expense reduction. Ultimately, the business will likely overlook strategic initiatives and instead focus on the next year-end rather than on supporting medium-term strategy execution.

How To Help Your Business Budget Succeed

  • Use Business Budgets That Can Adapt To Change: to develop a business budget that is likely to succeed, the business needs more frequently updated budgets so they can be adapted to changing circumstances.
  • Regularly Revisit Your Budget: in a few months time your business might become more or less lucrative and the effect of this is that your budget is not accomodating to the needs of your business. One of the risks of not revisiting your budget often is that if there is no wiggle-room then a single oversight may cause your budget to fail. Businesses should do regular reviews of actual spending and and forecasts, and if these do not align, you will have time to adjust the budget or rethink your spending.
  • Focus Your Budget On Data: most of the time businesses will base their budget off hard numbers and known expenses they are likely to have for that year. Instead, businesses should focus on data of previous spending to gauge what they are likely to spend and how much to allocate.
  • Use rolling budgets instead of fixed budgets: rolling budgets will allow your business to take advantage of unforeseen opportunities and shore up resources. It will reduce dependence on traditional year-end budgets that are likely no longer applicable to the current years market conditions.

Wrapping It Up

Creating and following a budget is a lot easier said than done. But if done right, a budget can enable the business to meet its objectives and make confident financial decisions. It is an iterative process where you will undoubtedly hit roadblocks throughout. However, considering the problems and solutions of business budgets addressed above, you will be on your roadmap to financial security.

Are you looking for budgeting assistance for your business? BUSINESSNAV is here to help you stay on top of your finances, generate cash flow, and ultimately navigate your business to growth. If you have any questions or enquiries click the button below: