Budgeting - Be conservative with your estimates

Last week I talked about working on income early.  If you missed that post, you can read it HERE.  This week’s topic is be conservative with your estimates.  One big temptation you need to avoid when preparing a budget is being too aggressive with your numbers, especially when you are working on your revenue. Today I discuss why. 

The Merriam Webster dictionary defines conservative as “marked by moderation or caution, a conservative estimate”.  Accountants are trained from the beginning to follow this principle. As a business owner this is not a natural tendency. Stepping out and opening a business is a risky thing. But when you are doing your budget, you need to temper that natural risk taking tendency. When you are doing your projections, allow yourself to think conservatively. This will help you keep your spending in line.  Then set your goals and go after them.  Remember that your income projections set the tone for the budget. Being too aggressive with revenue can create issues for you later in the year. If you missed that post you can review it HERE.  

You also need to be conservative with your expenses.  Talk to your vendors to see what they are expecting the upcoming pricing to be. This is also a great time to ask for discounts for timely payments and renegotiating lower pricing based upon your volume and loyalty.  Doing that research reduces surprises during the year and gives you more confidence that your budget will help you manage your business. Using the right tool for a job makes the job easier.  This also applies to using a budget to manage your business. Do the work to create a researched and well thought out budget, so it can be that right tool for you. 

Another great reason to be conservative when you are preparing your budget is to help you control your spending. It’s a lot easier to expand your spending then it is to reduce it. Use the items you are not purchasing as a reward to motivate you and your team for reaching revenue goals beyond your conservative budget. You could also just let the extra funds flow through to your bottom line!

Besides giving you a guide for your business for the year, a well prepared budget that you use to manage your business helps you ensure that what you are doing is going to be profitable.  Using your instincts or making it up as you go along may work in the short term, but in the long run your are going to miss something that is going to hurt your business and reputation.  You don’t need to add yourself to the list of things that are working against you. 

Be conservative when you are preparing your budget.  Remember that while taking risks is part of being a small business owner, it doesn’t help you prepare a good budget.  Use your risk taking talents to blow your budget out of the water.  That will help you put more of your hard earned money in your pocket!

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