Business Online Journal
 
5 Reasons Startups Should Overestimate Expenses and Underestimate Income
By: Soham Amatya
Published: October 12, 2016, 7:00 pm

Learning to live without a stable, predictable income stalls many entrepreneurs before they even start. Not knowing the amount you’ll be bringing in each week, month, and year can be hard to balance while shelling out those early startup expenses.

What is the best way to protect yourself from becoming stretched too thin? Learn to overestimate your expenses and underestimate your income. You’ll be setting yourself up for success long-term by using conservative estimates to your earnings and liberal estimates to your spending.

Are you still worried about living without a predictable paycheck? Have you gone around in circles creating a budget? Not sure how to prepare for the unplanned expense? Retirement? Healthcare? Emergencies? Wells Fargo and The Journal of the American Bankers Association are in agreement that it pays to overestimate your expenses and underestimate your income. Still not convinced that this is the best option for you?

Here are the top 5 reasons why it pays to inflate your expenses and downplay your revenue.

1.  Be prepared for the worst case scenario

No matter how passionate you are about your new business, success is not a guarantee. You’ve worked hard to put your vision into practice. You’ve been diligent, provided the best service possible, and done everything to attract the right clients. So your profit should be guaranteed, right?

Unfortunately, not all clients will honor your agreements. Many entrepreneurs have learned this the hard way, to the detriment of their businesses (and sanity). It’s why 50 percent of all startups fail within the first five years. Sometimes that payout you were counting on arrives weeks late, a huge credit card payment is declined, or a check that was mailed just doesn’t show up at all. If you’ve budgeted for greater spending and less income, your disappointment will be the worst takeaway from this experience. The alternative is worrying whether each client is going to pay on time if checks will clear, and if funds will transfer in time. 

2.  Emergencies won’t catch you off guard

Have you ever had a hospital visit that was convenient? Or a car accident that didn’t ruin your day? You’ve done your homework and have an emergency fund stashed away (right?) Unforeseen events can quickly drain your emergency fund dry, and then some. You’ve heard the saying: “When it rains, it pours." Big expenditures seem to have a way of piling up on top of each other. 

Having a little wiggle room in your budget won’t take the sting off of the emergency room bills. It will keep you from having to trade your business for that office job you couldn’t stand.

3.  You’ll be flexible

As an entrepreneur, it will take some time for you to generate a steady, predictable income, if this ever happens at all. The longer you are in business, the better you’ll be at predicting your expenses. But surprises still pop up from time to time. Suddenly needing to stay home for a week with your bedridden pre-teen? No problem if you’re getting significantly more from each client than you budgeted for. Electricity bill twice what you’d budgeted? You’re still okay because you expected your cell phone bill to be significantly higher. Wanting to take your new client out for a business lunch? You get the idea. 

The best part? You won’t ever have to put up with the “Why don’t you get a real job” nonsense again.

4.  You can accept a contract that doesn’t pay

Have you ever met the client of your dreams, only to realized that they just can’t afford you? Are you hoping to barter for services, but not sure if you can still make ends meet? If you plan to spend more and don’t count on a huge profit, you’ll have a greater opportunity to choose the business you want. 

If you’re living by the skin of your teeth, you may have to put pro-bono work on the backburner. Being able to take on these charity cases can remind you why you went into business for yourself in the first place. You’ll have the chance to barter with other self-starters for things that you really want, without worrying about how you’ll put food on the table at the end of the day. Bonus: Great networking comes from unpredictable channels. You’ll also be contributing positively to your community by giving back.

5.  Stash away extra income

Ever reach into your pocket and find a $20 bill that you didn’t realize was there? This one is pretty self-explanatory. If you’re consistently bringing in more money than you budget for, you’re going to have a little extra cash at the end of the day. Consider putting the additional funds into a high-return savings account in order to build up interest. Remember that you’re in charge of planning for retirement, emergencies, healthcare, and your children’s college expenses, to name a few. Or you can simply invest it back into your business. Either way, you’re planning for a positive future for yourself, your family and your company.

Don’t fall into the trap that so many startups sink into. Enjoy peace of mind by preventing surprise expenses that impact your business negatively. You’ll enjoy a greater takeaway at the end of the day. You’ll also be prepared for emergencies, and clients who aren’t always as reliable as you’d like. You can build your business to withstand the best and the worst by expecting to make less money, and planning to spend more. Your budget (and sanity!) will thank you.

Have you found it helpful to overestimate your expenses and underestimate your income? Do you have other positive experiences to share? We’d love your feedback in the comments below!

 

Photo credit: SFIO CRACHO/Shutterstock

Search