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As an entrepreneur, you likely have a fixed monthly budget that includes all of the overhead costs necessary to keep your business running smoothly. For example, your budget might include payroll for employees and freelancers, payments for internet service and cloud-based project management software, rent for office space, and more. It is essential that you stick to this monthly budget in order to maximize the financial profitability of your business. health – if you spend way too much money in a month, it can really hurt your overall business profits.
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Have you recently gone over your company’s monthly budget and you don’t know why? Do you want to prevent possible future financial difficulties? In my experience as CEO and Founder of CMA Exam Academy, a Certified Management Accountant Examination Exam Program, I have discovered a number of common ways that business owners unknowingly drain budgets. of their companies. Here are some of those mistakes to avoid in order to optimize your business’ financial situation and increase your overall business success.
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1. Not regularly comparing budget to actual expenses and income
2. Don’t push big non-essential spending to later months with new budget cycles
3. Pursue new projects that were not budgeted
4. Confusing Net Profit with Free Cash
5. To sum it all up
Not regularly comparing budget to actual expenses and income
Often, business owners do not maintain an unwavering discipline when it comes to comparing their business budget to actual overhead costs and revenue generated each month. Whether they’re jostling to meet project deadlines or rushing to respond to urgent emails from clients and employees, their attention is always drawn in many directions, resulting in this necessary bookkeeping task constantly being relegated to second place. plan. Don’t make this mistake! It is essential that you take the time to regularly compare your budget to your actual expenses and income.
Why is it? Well, that’s because it’s easy to completely forget about recurring expenses (like subscriptions to software you stopped using months ago), which will really eat into the budget. You can also completely ignore that 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 each month to review your financial statements. Then you can compare the budget to actual spending, cut unnecessary costs, and make operational changes to ensure you don’t overspend.
Do not postpone large non-essential expenses to subsequent months with new budget cycles
This is a major mistake that so many business owners make. They’ll be happy to upgrade their computer, spend thousands of dollars on a new software platform, pay a developer a ton of money to revamp their company’s website, and immediately incur other expenses. important but not essential. Don’t make that big mistake either – it would be in your company’s interest to always check whether a major expense is in the current month’s budget, or whether it needs to be pushed to a later month with a new budget cycle.
You can check with your accountant about this, or simply follow the aforementioned step and compare your actual expenses to your budget to see if there is enough budget to make the big expenses for the current month. However, if the expense is essential to the proper functioning of your business (for example, if the equipment you use to manufacture products has stopped working and needs to be replaced), you can make the big purchase right away and adjust the next month’s budget to offset overspending in the current month.
Pursue new projects that were not 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 in your own business? Many business owners will be excited about a new project and then make the mistake of pursuing it without considering how it affects other items in their monthly budget. Even if the project has not been budgeted, they will spend money on capital expenditures to move it forward. It’s not a smart decision to make in your own business.
If you make the hasty decision to go ahead with the brand new project or capital expenditure, you will take money from other items in your budget that were already accounted for. For example, the money you spend on a new customer service initiative may reduce the amount of capital you can devote to 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 in your budget.
Confusing Net Profit with Free Cash
As a Certified Management Accountant, I’ve seen many business owners make the mistake of looking at profit in their profit and loss statement as the basis for how much available “cash” they had in their Bank. They would then mistakenly make major business decisions based on that number alone. However, it is so important for all business owners to know that net profit is not equal to the amount of money available in the bank.
Since cash is typically an organization’s most critical and liquid resource, it has a dramatic effect on liquidity, financial flexibility, and operational capacity. FASB ASC Topic 230, Statement of Cash Flows (formerly SFAS No. 95), states that a cash flow statement “should report the cash inflows, cash outflows, and net change in cash of a company from its operating, financing and investing activities during the accounting period, so as to reconcile the opening and closing cash balances.
Thus, readers of the cash flow statement can verify whether the business has generated enough cash (not just net income) to meet all of its obligations. Cash Flow Statement (SCF) is the report that contains cash inflows and outflows during a specified period of time.
To wrap it all up
In order to keep your business running smoothly, setting and sticking to a monthly budget is essential. Avoid unknowingly emptying your monthly budget by comparing it to your actual expenses and income. Also, if the current month’s budget doesn’t allow it, push a big non-essential expense to a later month with a new budget cycle. You can also make sure you don’t unknowingly exhaust your budget by researching how pursuing a brand new project would affect other already budgeted initiatives. Finally, prepare a comprehensive cash flow statement so you always know how much cash is actually available for purchases.
About the Author
Nathan Liao is the founder of CMA Exam Academy, one of the top Certified Management Accountant exam exam programs. As a CMA and CMA Coach, Nathan mentors accounting and finance professionals in over 80 countries to achieve their CMA certification in as little as 8 months. The CMA Exam Academy’s unique exam framework has proven to be the key to its students’ outstanding success in achieving their dream of earning the Certified Management Accountant certification.
Updated on January 19, 2022 at 2:09 p.m.
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