For some people planning a budget is an uphill struggle, while others find it a piece of cake – place the expenses on one side, the revenues – on the other, and that is it. This is a daily routine for me, but I cannot say it is an easy task because this would underestimate the process itself, while when we underestimate the budget, our business will be doomed.
The budget is one of the things where the risk of making a mistake is highest. If you make a mistake in the presentation of the project, most likely you can correct it on the fly. When it comes to budgeting, however, it is expected that you have done a stable plan for the money flows for each month, despite that they are a dynamic matter. Most often mistakes are made due to distraction or lack of experience by missing different expenses that you will have to make.
Other expenses are neglected because they are considered too small to be described. Mostly these are expenses that seem banal at first sight, rather domestic and household costs, such as toilet paper, soap, coffee, overheads, cleaning, security guards, and others.
Toilet paper is the example I really love giving. It is ridiculous to discuss such a trifle chores but due to the fact that it is neglected (either because it is insignificant or because it is too embarrassing to discuss it), sometimes it changes the money flows in a strange direction, and, believe me, the investor does not care whether you have toilet paper after the expenses have registered an ungrounded growth.
You should bear in mind that these expenses are always missed and cost a significant amount of money because for one reason or another it is a consumable that is exhausted much faster than the coffee. And what is most important is that this is an expense you make every month and at a certain moment it may turn out that on annual basis your expenditures on different household trifles turn out to be bigger than those on workstations.
It is a frequent phenomenon for the team behind the future business to wish to please the investor in a strange way – by cutting the expenses on the project. For instance, they set unrealistically low expenses on office materials and equipment with the idea that the team may work even in a basement or from home. Some cut their salaries or even exclude this item for several months. Others cut the expenses by using their own laptops and phones, thus transferring company’s expenses to themselves.
All such attempts of cutting the budget will not be noticed or appreciated by the investor because they are not interested in the sacrifice you make but in the profit, you will bring. You may not eat or sleep if you wish – it is up to you, but the investor will be focused on the revenues you will generate and not on the few thousands you have saved scarifying your comfort and quality of life.
Small reserve for rainy days
No matter how much the budget has swelled up, you should always add an item that must be present in every budget – cost contingency. I usually set this item at a minimum of 7% of the general expenses but the more you manage to negotiate, the better. No matter how precise the budget you have worked out is, there are always unexpected expenses, which need to be covered and if you do not want to pay for them from your own pocket, you should plan a nice reserve. I can guarantee that you will use it all.
Now, let us go back to the presentation before the investor – often this item seems frighteningly big and only boosts the budget. You instinctively try to cut it so as to please the one that will pay the money. This is the biggest mistake you can make. In one of my latest cases, the budget we worked on was estimated at $4 million. 7% of this sum increased our budget with $280,000.
Due to the size of this item my team and I started hesitating whether to cut the reserve but after discussing it for a few days we decided to leave it this way and it did not bother the investor at all. The more curious question here is who would have paid the money if it was not provided in the planned budget? You can always give $100 or even $1,000 from your own pocket but things are much different when the sum is hundreds of thousands.