6 Reasons Why Your Budget Is Failing

Mar 21, 2023
6 Reasons Why Your Budget Is Failing

Following a budget is important if you want your business to maintain a steady, predictable cash flow and keep costly expenses to a minimum. However, following a budget is challenging and requires both knowledge and discipline. As many as 20% of small businesses fail in their first year, and the driving reasons typically involve inadequate financial management. Accurately anticipating start-up costs as well as daily operating expenses and revenue sources helps prevent a sudden depletion of cash flow and a financial crisis that can put you out of business quickly. Setting a good working budget is an exercise that, while sometimes tedious, will give you the best guidance in spending and will hold you accountable so that you do not run out of money too soon or spend on the wrong priorities.

If you are struggling to stay on budget—or to create an accurate one—some common reasons may be the culprit.

Reasons your budget is failing:

1. Your expenses are higher than you anticipated

If you work off a monthly or quarterly budget, it must contain an accurate forecast of all your periodical expenses. While some of these are fixed costs that are unlikely to change (much) over the year, variable costs need to be estimated. An inaccurate projection can take you off course quickly. Save receipts for all purchases and expenditures and record them diligently so that you can see clearly at the end of the budget cycle where you spent more than planned and then make adjustments so that the next month or quarter is on target.

2. You didn’t create enough categories or sub categories

The more specific your budget categories, the better you’ll be able to track your expenses and spot discrepancies or overspends as soon as they occur. While you don’t want to break out endless subcategories over every nickel and dime, being as specific as possible with your expenditure types improves your ability to analyze spending more accurately.

3. A one-time cost or emergency item was not planned for

Budgets are planning tools, and to be successful, they must expect the unexpected. If your budget is too tightly-crafted, you may not have a cushion for a large, unexpected expense that hits you suddenly. Building in a spending cushion—as well as accumulating an emergency fund over time—is the best way to protect your budget from an unavoidable, cash-draining expenditure that comes out of nowhere.

4. You are mixing personal and business expenditures

Solopreneurs, seasonal service providers, and people who own their own business as a side gig often blend their business earnings with personal funds. While it is generally advisable to open a separate account for business transactions—even if the business is a small one—not everyone opts for that. A budget can still be successful if personal and business money is mixed, but it takes more discipline, particularly during the reconciliation process so that every personal expense is isolated from the business spending.

5. Revenue is down

If business has slowed down due to seasonal or circumstantial factors or if sales fell short of goals, you may not bring in as much money as your budget projects for a given month or quarter. Failing to collect outstanding invoices promptly will also leave you with insufficient cash to cover budgeted expenses. Automating invoicing services that send out client invoices and reminders for you can help remedy poorly-managed receivables and get your cash flow and budget back on track.

6. You aren’t making continuous updates to your budget

A budget is a tool that is only useful when it is put into use regularly and consistently. Setting a good budget is a first step; unfortunately, it is only a step. Continual discipline is needed to actually follow the budget, evaluate it, and update it so that it can provide its maximum benefits. Periodical reconciliation of your actual spending with your budget’s projections allows you to make adjustments in real time and forecast more accurately for the next month or quarter.

Your budget is a financial management tool that needs to be flexible. Online financial services that are widely available to small businesses can help generate a working budget if you don’t already have one and then track and categorize revenue and expenses so that you can easily access your financial data from anywhere. Online check printing that integrates with your accounting or bookkeeping software is a great addition to other financial management tools because it syncs payment data automatically and stores all checks issued in a secure registry that can be accessed, exported, or printed on demand for the most accurate, up-to-the minute budgetary management.