"Be realistic!" "Create a detailed Excel spreadsheet!" "Be clear about your goals!" These are just a few of the tips event managers receive when planning their event budget.
Many of you have probably spent countless hours designing colorful Excel spreadsheets, figuring out the concepts per column, and trying to remember all the suppliers and services you’ll have to pay for. But no matter how many times you double-checked your list, there's always something you forgot, a number you miscalculated, or an expense you didn't foresee.
Well, guess what? Although multiple experts and blogs encourage you to follow their steps, promising flawless results, you'll always run the risk of setting up an erroneous budget. So before learning how to use Excel or complex mathematical formulas to calculate your event's costs and expenses, let's understand the most common budget mistakes you may be making.
Mistake #1. You trust your reasoning way too much
Bad news: you suck at making rational decisions involving money. Good news: you're not alone. That's how we humans work. In his book Predictably Irrational: The Hidden Forces That Shape Our Decisions, professor Dan Ariely notes that contrary to standard economics assumptions about the prevalence of rationality in money-related choices, people are far less rational when it comes to financial decisions.
The researcher explains that while making money-based choices, people are susceptible to different influences from their environment, shortsightedness, and irrelevant emotions. Let's say that for your next event, you have to choose between two catering services. The first one provides higher quality and standards than the second one, and you know this. The catering package you want for the event includes refreshments, fruit, and sandwiches. The prices are the same for the both companies, yet the second one (with lower quality and standards) provides the fruit for free.
Dan Ariely's investigation results show that although you'll pay the same amount of money for both caterers, you are more likely to buy from the second company because of the free fruit option. As Ariely highlights, "FREE! gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is."
The results? You paid the same amount of money, but intentionally used a catering company with lower standards.
EventProf Tip: It's quite difficult to track and realize the fallacy in these small financial decisions. Before making a decision, write down all the pros and cons of each service or product. This way, you’ll be able to better visualize what you have to gain or lose. Don’t be in a rush, and give yourself time to evaluate each step.
Mistake #2. You are willing to pay more money for bad services or products
Sounds crazy, right? But the truth is that your financial decisions will often make you lose money without you even realizing it. According to Daniel Kahneman, a famous psychologist and winner of the 2002 Nobel Memorial Prize in Economic Sciences, "The decision to invest additional resources in a losing account, when better investments are available, is known as the sunk-cost fallacy, a costly mistake that is observed in decisions large and small."
In other words, sunk-cost fallacy is responsible for your blindness when it comes to additional investment in products that don’t work. For example, let’s say that you paid big money for event management software that, instead of helping you solve logistic problems, appears to be useless. Because of your investment and initial enthusiasm in using this product, you’d be willing to pay even more money to get a more advanced version of the software, thinking that it will be a better fit for your needs. As Erik Sherman notes in his Inc.com article, "no one likes having thrown money away, so you think if you just spend a little more, you can salvage the previous expense. All too often, that leads to the situation called throwing good money after bad."
EventProf Tip: Whenever something you paid for doesn’t work, don’t try to "save it" by pouring even more money into an upgraded or advanced version. Be conscious about your decisions and establish a strict protocol related to event products or services that fail to deliver the expected outcomes.
Mistake #3. You have an optimistic mindset about the expenses
It's always good to be positive about the results you’ll achieve when planning an event, yet this could backfire when it comes to your budget. According to Daniel Kahneman, people who are too optimistic when planning a project’s budget "end up paying much more than they would if they had made a realistic plan and stuck to it."
Kahneman suggests, "Errors in the initial budget are not always innocent. The authors of unrealistic plans are often driven by the desire to get the plan approved - whether by their superiors or by a client - supported by the knowledge that projects are rarely abandoned unfinished merely because of overruns in costs or completion times." How about you? Do you feel the urge to please your clients by presenting an erroneous event budget? Are you unconsciously minimizing the costs of the event planning, showing an unjustified optimism? Maybe you should review the event budget and adjust the low expenses to a more realistic forecast.
EventProf Tip: Analyze the contrasts. After you draft the first version of the budget, take a look at it and apply a negative mindset by increasing the expenses. Then, check the 'optimistic' and 'pessimistic' version of the budget. Subsequently, find the balance between the two and adjust the expenses to a more realistic plan (neither overly optimistic nor pessimistic). This way, you’ll craft a reliable event budget, protecting your clients from big surprises.
While planning the budget for your next event, know that the real mistakes you’ll make aren’t related to your mathematical or computer skills. When it comes to money and budgeting, be extra cautious of your decision-making rationale. Be prepared to fail and find quick solutions. Double-check everything and carefully analyze the pros and cons of each choice you’ll make. Moreover, maintain a more realistic mindset, which will allow you to be less influenced by irrelevant emotions and external factors. Good luck!