By Analytix Editorial Team
Business expenditure plans are critical to ensure consistent spending power within a business. An expenditure plan is also a tool employed by the business to manage revenue.
An expenditure plan accounts for both long term and short term spending. It tracks the following areas within the business:
Pitfalls to watch out for
1. Incorrect evaluation of income
This is a common pitfall when drafting an expenditure plan. Income sources may not be as dependable as they appear, amount of income expected may not be generated, bonuses may not materialize, taxation policies may change, or expected sales may not close. Each of these can decrease your company’s income.
2. Incorrect estimation of expense
The success of your expenditure plan also depends on how accurately you estimate your fixed expenses. Fixed expenses include infrastructure costs such as rent, utilities and salaries. Apart from incorrect or low estimation of expenses, an expenditure plan may also lack the provision to designate part of the fixed expenses to savings. This deprives the business of an emergency cash fund to fall back on.
3. Variable expenses not accounted for
If an expenditure plan does not account for variable expenses which may fluctuate, you may find yourself facing an unexpected shortage of funds. You can avoid this by researching trends or past prices for some common variables like supplies, utilities, etc.
4. Incorrect estimation of financial goals
When estimating income, you may perform some basic accounting to allocate expenses to various business needs. However, your expenditure plan also needs to account for changes in financial plans. Spending needs may change or increase while the income generated may not change at all.
Business financial goals can include paying-off debts or money owed when starting the business, reaching breaking even, and eventually generating a profit. The difference between your total income and the sum of all expenses should provide a general indication of whether the business will have incremental funds to fulfill your financial goals. Remember to account for both fixed and variable expenses when calculating total expense. If you find that expenses exceed total income, you may need to adjust your financial goals.