Anyone with an innovative business idea is labeled as an entrepreneur. It does not matter what background he/she comes from. However for the business idea to be a successful venture, there are few things with respect to finances that an entrepreneur must take care of. Here is a list of do’s and don’ts for an entrepreneur when it comes to capital budgeting.

  1. Learn the basics – You do not have to dig deep into subjects such as business, accounts, finance, and management. However, an understanding of the basics is essential to avoid loss. For example, you should be able to identify cash inflows from outflows and know the difference between profit and loss.

  2. Allot sufficient funds for the fixed costs – Fixed costs tend to be generally high. Fixed costs include expenses incurred for renting out office spaces, staff salaries, loans, mortgage payments, basic infrastructure, furniture, and similar others. Therefore, in addition to sufficient allocation of funds, it is necessary to prioritize and plan your fixed costs to ensure they are kept as low as possible.

  3. Calculate ROI for anything and everything – It is important to calculate the rate of investment (ROI) on every decision you make. Be it a fixed cost, variable cost, staff hiring, asset, or any other thing, calculating the ROI is important

  4. Allocate individual budgets – Capital budgeting or capital allocation is a skill that every entrepreneur must attain. Forecasting or projecting future expenses and returns must be foreseen in order to make the right financial decisions.

  5. Do not get ahead of yourself – Many entrepreneurs make the mistake of overestimating or overanalyzing the future revenues. Although it is a good trait for entrepreneurs to be optimistic, it is not a good thing to go overboard and make unrealistic assumptions, especially when it comes to finances. Therefore, budgeting, expense planning, and all investment decisions need to be realistic to avert losses. Additionally, you must plan for unexpected circumstances that can draw away your profits.

  6. Never underestimate any cost – Another common mistake that new ventures commit is that they spend more than the planned budget, thereby increasing the company’s turnaround time and break-even period. Therefore, it is not sufficient that you plan the budget but it is equally important you adhere to it.

  7. The other do’s & don’ts – Save up on the expenses, plan short-term & long-term, and do not get into the habit of too much borrowing. These are essential to keep the cash rolling and operate smoothly without any financial hiccups.

Although capital budgeting may not seem everyone’s cup of tea or as exciting as the business idea, it is necessary to get a hang of it in order to manage finances in the best possible manner.