Imagine if every time you debited an entry from your checkbook, you rounded up to the nearest dollar. How much money would you find in your account to spend at the end of the year? This kind of overestimation creates slack in your budget and gives you peace of mind knowing that you’ve got a few coins tucked away for a rainy day.
Budgetary slack is not a sustainable long-term accounting practice, as accounts must be rectified and reported precisely at some point, but the art of overestimating expenses creates a cushion between the red line and your day-to-day operations. You can always evaluate the true financial health of your company by using other methods while creating budgetary slack to keep yourself on track.
One way to create slack is to stick to a very conservative budget for expenses. No one knows better than a small business owner that a penny saved is a penny earned. Set aside a certain amount each month for operating expenses, and try to come in under that number. Negotiate for more conservative terms with prospective suppliers, and look for ways to cut unnecessary extras.
Having a safety net in your budget is especially important when you’re expanding your business. Whether you’re building a new office or bidding on a new contract, slightly overestimating costs protects you against shortages and unforeseen expenses. A little slack in your budget could allow you to hire a new employee or upgrade your company equipment, making you more competitive in your field.
You never know when an added expense might pop up in the day-to-day life of your business. If you include a little slack in your budget, at the end of the year, you could reward your employees, pay down debt, or throw a nice holiday party with the surplus.