It’s the new year, and the time that people make budgets. In this two-minute tip, I’m going to save you time and headaches by telling you the five reasons why budgets fail — and what you should do instead.
Why Budgets Fail Small Business Owners
The first reason budgets fail is because a budget gives the illusion of control. Now, if 2020 reminded us of anything, it’s that that we cannot predict the future. You cannot control external events; you can only respond to them.
The second reason budgets fail is that the assumptions on which they are based turn out to be wrong. You may have planned for a certain amount of income, or a certain spend on rent or salary — but what happens when that key employee leaves? Or you don’t meet those sales targets (or vastly exceed them)?
Your original budget has to be scrapped and redone to be useful. And then something else changes. Repeat.
The third reason is that it takes too long to make a budget. You have to look at the past, guess at the future, and factor in all of the “what ifs”…none of which are revenue-producing activities. So budgeting it gets put off, or not done thoroughly, or never gets redone if something changes.
The fourth reason, similar to #3, is that if you do take the time away from the business to create a budget or hire someone else to produce it for you, it costs a LOT.
Finally, the fifth reason is that it often causes unnecessary OVERspending. If you have $100 budgeted for office supplies and are way below that, you might take that as permission to buy a fancy new whatever that you don’t really need, instead of protecting that “extra” money as profit.
If budgets don’t work, now what?
So if you don’t budget, what should you do? Well, if you know me you already know the answer is to implement the Profit First system. By dividing up your income based on a percentage, you have a natural and sustainable budget — even as your income fluctuates — that always keeps your spending in line with your income and guarantees profitability.
Want to know more about Profit First? Download the first two chapters of the Profit First book for free, or keep watching on the Moxie Instagram for more money smart tips from Moxie.
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