budgets and business planning process

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How to Create a Business Budget for Your Small Business

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A business budget estimates future revenue and expenses in detail, so that you can see whether you’re on track to meet financial expectations for the month, quarter or year. Think of your budget as a point of comparison — you run your actual numbers against it to determine if you’re over or under budget.

From there, you can make informed business decisions and pivot accordingly. For example, maybe you find that your expenses are over budget for the quarter, so you may hold off on a large equipment purchase.

Here’s a step-by-step guide for creating a business budget, along with why budgets are crucial to running a successful business.

» MORE: What is accounting? Definition and basics, explained

QuickBooks Online

How does a business budget work?

Budgeting uses past months’ numbers to help you make financially conservative projections for the future and wiser business decisions for the present. If you’ve had a few bad months and predict another slow one, you can prepare to minimize expenses where possible. If business has been booming and you’re bringing in new customers, maybe you invest in buying more inventory to satisfy increased demand.

Creating a business budget from scratch can feel tedious, but you might already have access to tools that can help simplify the process. Your small-business accounting software is a good place to start, since it houses your business’s financial data and may offer basic budgeting reports.

To create a budget in QuickBooks Online , for example, you break down your estimated income and expenses across each area of your business. Then, the software calculates figures like gross profit, net operating income and net income for you.

You can then compare actual versus projected figures side by side by running a Budget vs. Actuals report. Businesses that need more in-depth features, like cash flow forecasting or the ability to use different projection methods, might subscribe to business budgeting software in addition to accounting software.

If your small business doesn’t have access to these features or has simple financials, you can download free small-business budget templates to manually create and track your budget. Regardless of which option you choose, your business will likely benefit from hiring an accountant to help manage your budget, course-correct when the business gets off track, and make sure taxes are being paid correctly.

Why is a business budget important?

A business budget encourages you to look beyond next week and next month to next year, or even the next five years.

Creating a budget can help your business do the following:

Maximize efficiency. 

Establish a financial plan that helps your business reach its goals. 

Point out leftover funds that you can reinvest.

Predict slow months and keep you out of debt.

Estimate what it will take to become profitable.

Provide a window into the future so you can prepare accordingly.

Creating a business budget will make operating your business easier and more efficient. A business budget can also help ensure you’re spending money in the right places and at the right time to stay out of debt.

How to create a business budget in 6 steps

The longer you’ve been in business, the more data you’ll have to inform your forward-looking budget. If you run a startup, however, you’ll want to do extensive research into typical costs for businesses in your industry, so that you have working estimates for revenue and expenses.

From there, here’s how to put together your business budget:

1. Examine your revenue

One of the first steps in any budgeting exercise is to look at your existing business and find all of your revenue sources. Add all those income sources together to determine how much money comes into your business monthly. It’s important to do this for multiple months and preferably for at least the previous 12 months, provided you have that much data available.

Notice how your business’s monthly income changes over time and try to look for seasonal patterns. Your business might experience a slump after the holidays, for example, or during the summer months. Understanding these seasonal changes will help you prepare for the leaner months and give you time to build a financial cushion.

Then, you can use those historic numbers and trends to make revenue projections for future months. Make sure to calculate for revenue, not profit. Your revenue is the money generated by sales before expenses are deducted. Profit is what remains after expenses are deducted.

2. Subtract fixed costs

The second step for creating a business budget involves adding up all of your historic fixed costs and using them to reliably predict future ones. Fixed costs are those that stay the same no matter how much income your business is generating. They might occur daily, weekly, monthly or yearly, so make sure to get as much data as you can.

Examples of fixed costs within your business might include:

Debt repayment.

Employee salaries.

Depreciation of assets.

Property taxes.

Insurance .

Once you’ve identified your business’s fixed costs, you’ll subtract those from your income and move to the next step.

3. Subtract variable expenses

As you compile your fixed costs, you might notice other expenses that aren’t as consistent. Unlike fixed costs, variable expenses change alongside your business’s output or production. Look at how they’ve fluctuated over time in your business, and use that information to estimate future variable costs. These expenses get subtracted from your income, too.

Some examples of variable expenses are:

Hourly employee wages.

Owner’s salary (if it fluctuates with profit). 

Raw materials.

Utility costs that change depending on business activity.

During lean months, you’ll probably want to lower your business’s variable expenses. During profitable months when there’s extra income, however, you may increase your spending on variable expenses for the long-term benefit of your business.

4. Set aside a contingency fund for unexpected costs

When you’re creating a business budget, make sure you put aside extra cash and plan for contingencies.

Although you might be tempted to spend surplus income on variable expenses, it’s smart to establish an emergency fund instead, if possible. That way, you’ll be ready when equipment breaks down and needs replacing, or if you have to quickly replace inventory that's damaged unexpectedly.

5. Determine your profit

Add up all of your projected revenue and expenses for each month. Then, subtract expenses from revenue. You may also see the resulting number referred to as net income . If you end up with a positive number, you can expect to make a profit. If not, that’s a loss — and that can be OK, too. Small businesses aren’t necessarily profitable every month, let alone every year. This is especially true when your business is just starting out. Compare your projected profits to past profits to confirm whether they’re realistic.

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6. Finalize your business budget

Are the resulting profits enough to work with, or is your business overspending? This is your opportunity to set spending and earning goals for each month, quarter and year. These goals should be realistic and achievable. If they don’t line up with your projections, make sure to establish a strategy for making up the difference.

As time goes on, regularly compare your actual numbers to your budget to determine whether your business is meeting those goals, and course correct if necessary.

» MORE: Ways your small business can spend smarter

A business budget projects future revenue and expenses so you can create a smart, realistic spending plan. As the year progresses, comparing your actual numbers against your budget can help you hold your business accountable and make sure it reaches its financial goals.

A business budget includes projected revenue, fixed costs, variable costs and the resulting profits. You can also factor in contingency funds for unforeseen circumstances like equipment failure.

On a similar note...

Planning, budgeting and forecasting is typically a three-step process for determining and mapping out an organization’s short- and long-term financial goals.

• Planning  provides a framework for a business’ financial objectives — typically for the next three to five years.
• Budgeting  details how the plan will be carried out month to month and covers items such as revenue, expenses, potential cash flow and debt reduction. Traditionally, a company will designate a fiscal year and create a budget for the year. It may adjust the budget depending on actual revenues or compare actual financial statements to determine how close they are to meeting or exceeding the budget.
• Forecasting  takes historical data and current market conditions and then makes predictions as to how much revenue an organization can expect to bring in over the next few months or years. Forecasts are usually adjusted as new information becomes available. 

The process is usually managed by a chief financial officer (CFO) and the finance department. However, the definition can be expanded to include all areas of organizational planning including: financial planning and analysis , supply chain planning , sales planning , workforce planning and marketing planning .

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Basic business accounting practices date as far back as the 1400s, when Venetian investors kept track of their Asian trade expeditions using double-entry bookkeeping, income statements and balance sheets. The word “budget” is from the old French word “bougette,” meaning “small purse.” The British government began to use the phrase “open the budget” in the mid-1700s, when the chancellor presented the annual financial statements. Businesses began to regularly use the term “budget” for their finances by the late 1800s.

Modern business forecasting began in response to the economic devastation of the Great Depression of the 1930s. New types of statistics and statistical analyses were developed that could help business better predict the future. Consulting firms emerged to help companies use these new prediction tools.

Accounting and forecasting were difficult in the early 20th century because they depended on laborious hand-written equations, ledgers and spreadsheets. The emergence of mainframe computers in the 1960s and personal computers in the 1980s sped up the process. Software applications such as Microsoft Excel became widely popular for financial reporting. However, Excel programs and spreadsheets were prone to input errors and cumbersome when various departments or individuals needed to collaborate on a report.

By the start of the 2000s, companies gained access to ever-growing operational data sources, as well as information outside corporate transaction systems — such as weather, social sentiment and econometric data. The vast amounts of available data for forecasting created a need for more sophisticated software tools to process it.

Numerous planning software packages emerged to handle this data complexity, making planning, budgeting and forecasting faster and easier — both for processing and collaboration. With predictive insights drawn automatically from data, companies could identify evolving trends and guide decision making with foresight, not just hindsight.

Today, cloud-based systems are becoming the standard, providing more flexibility, security and cost savings — helping organizations generate accurate predictions and budgets with fewer errors.

But despite these advancements, businesses are still quite dependent on traditional spreadsheets. 1   Seventy percent of businesses say they rely heavily on spreadsheet reporting, with only 16 percent using on-premise specialist software — and only ten percent using cloud software for planning.

Many businesses still base their strategy on annual plans and budgets, which is a management technique developed over a century ago. But in today’s more competitive environment, organizations are realizing that plans, budgets and forecasts need to reflect current reality — not the reality of two, three or more quarters ago. Continuous planning and rolling forecasts are becoming widely used methodologies to update plans, budgets and forecasts frequently throughout the year, on a quarterly or even monthly basis. These approaches help managers spot trends before their competitors — helping them make better informed, more agile decisions about pricing, product mix, capital allocations and even staffing levels.

Creating and implementing a sound planning, budgeting and forecasting process helps organizations establish more accurate financial report and analytics — potentially leading to more accurate forecasting and ultimately revenue growth. Its importance is even more relevant in today’s business environment where disruptive competitors are entering even the most tradition-bound industries.

When companies embrace data and analytics in conjunction with well-established planning and forecasting best practices, they enhance strategic decision making and can be rewarded with more accurate plans and more timely forecasts. Overall, these tools and practices can save time, reduce errors, promote collaboration and foster a more disciplined management culture that delivers a true competitive advantage.

Specifically, companies are able to:

• Quickly update plans and forecasts in response to new threats and opportunities, identifying risk areas early enough to rectify issues before they are serious.
• Identify and analyze the impact of changes as they occur.
• Strengthen the links between operational and financial plans.
• Better plan and predict cash flows.
• Improve communication and collaboration among plan contributors.
• Consistently deliver timely, reliable plans and forecasts, plus contingency plans, for a range of possible events.
• Analyze variances and deviations from plans and promptly take corrective action.
• Create a budget specifically for growth and having confidence in how much can be spent.
• More accurately manage sales pipelines while tracking performance against targets.
• Make more confident strategic decisions based on hard data, instead of hopes or guesswork.
• Provide evidence of an organization’s future trajectory to potential investors and lending institutions based on multiple data sources and sophisticated analysis.

Budgeting, planning and forecasting software can be purchased as an off-the-shelf solution or as part of a larger integrated corporate performance management (CPM) solution.

Advanced software solutions enable organizations to:

• Measure and monitor performance through interactive, self-service dashboards and visualizations.
• Examine root-causes with high-fidelity analysis of dimensionally rich data.
• Evaluate trends and make predictions automatically from internal or external data.
• Perform rapid what-if scenario modelling and create timely, reliable plans and forecasts.

Planning is easier and more effective when practitioners follow well-established best practices. Software solutions that support these practices can enhance the timeliness and reliability of information and increase participation by key people throughout the organization; especially those at the front lines.

Leading companies have moved to solutions that address the full planning cycle — data collection, modeling, analytics and reporting — on a common planning platform with lean infrastructure requirements. Such platforms can handle a diverse range of business functions, from budget-focused finance tasks to, for example, supply chain-focused planning for retail environments with thousands of SKUs (stock keeping units).

Companies like IBM offer holistic, integrated software solutions to streamline the planning, budgeting and forecasting process. The logic is that to adapt to today's quickly changing business conditions, an organization needs one solution that creates a single source of truth and visibility into all its data. These solutions can extend well beyond the financial aspects of the business, becoming a powerful forecasting engine across the enterprise. With these agile planning and exploratory analytics software solutions — whether in the cloud or on-premises — companies can perform planning, budgeting and forecasting with greater speed, agility and foresight.

Evaluating and selecting planning, budgeting and forecasting software is a complex task. It requires careful consideration of the software’s functionality, its value to the planning process and its ability to support planning best practices. There are also factors such as vendor reliability and support, user community connections and commitment to customer success once the sale is complete.

IBM Analytics  recently published a guide to help organizations evaluate planning, budgeting and forecasting software — identifying key qualities to look for:

• Adaptive . Can you rapidly change models and re-forecast frequently, based on input from business units? Can you update plans as often as necessary?
• Timely . Is your information always current because users contribute directly to a central planning database? Are your consolidations and rollups done automatically to easily meet deadlines?
• Integrated . Do your planning, analysis, workflow and reporting functions reside on one common platform, reducing the need to maintain “shadow” planning systems?
• Collaborative . Is your solution web-based? Does it enable participation anytime, from anywhere with a secure connection?
• Self-service . Are users able to access data and perform complex analysis without the assistance of IT? Are you able to use a familiar spreadsheet interface for faster user adoption and accelerate time to value?
• Enterprise-scale data capacity . Is your solution capable of handling very large data volumes without limiting cube size? Some solutions do not handle “data sparsity” well — forcing data to be split into multiple cubes for analysis, causing version control issues.
• Efficient . Are your managers able to spend less time managing data and more time managing the business?
• Relevant . Do you have the ability to customize views for different user roles, to help increase adoption and process ownership? Do you have formula capabilities that enable modeling of all relevant business drivers?
• Accurate . Do your plans contain errors because of broken links, stale data, improper rollups and missing components?

The key is not just evaluating product features and capabilities, but also evaluating how those features will be implemented by different users within the organization. It’s important to test any planning solution that will be used by a large variety of stakeholders such as finance, operations, HR and sales.

Discover how one of the largest operators of parking facilities in the Middle East used IBM Planning Analytics to deliver better automation and multidimensional analytical power along with cost advantages.

Learn how the real estate developer enhanced its core planning, forecasting and project management capabilities with IBM technology to drive even greater profitability.

Find out how the company used IBM planning analytics to provide monthly and weekly reporting for engineering, marketing, sales and operations.

IBM Planning Analytics provides a single solution to automate planning, budgeting and forecasting for your enterprise.

Gain the autonomy you crave to find, explore and share insights in the governed, trusted environment you need, with IBM Cognos Analytics.

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Learn how companies are delivering dependable business forecasts and optimizing the allocation of resources.

Learn the five common drawbacks to spreadsheets as planning tools

Discover the benefits of embracing data and analytics in conjunction with well-established planning and forecasting best practices.

See how you can synthesize information, uncover trends and deliver insights to improve decision making throughout the enterprise.

Request a live, 10-minute demo and get hands-on experience with IBM Planning Analytics by building a revenue plan.

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1 The Future of Planning, Budgeting and Forecasting Global Survey, Workday and FSN, 2017  (link resides outside ibm.com)

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How Budgeting Works for Companies

What Is a Budget?

A budget is a forecast of revenue and expenses over a specified future period. Budgets are utilized by corporations, governments, and households and are an integral part of running a business (or household) efficiently. Budgeting for companies serves as a plan of action for managers as well as a point of comparison at a period's end.

The budgeting process for companies can be challenging, particularly if customers don't pay on time or revenue and sales are intermittent. There are several types of budgets that companies use, including operating budgets and master budgets as well as static and flexible budgets. In this article, we explore how companies approach budgeting as well as how companies deal with missing their budgets.

Key Takeaways

• A budget is a forecast of revenue and expenses over a specified period and is an integral part of running a business efficiently.
• A static budget is a budget with numbers based on planned outputs and inputs for each of the firm's divisions.
• A cash-flow budget helps managers determine the amount of cash being generated by a company during a period.
• Flexible budgets contain the actual results and are compared to the company's static budget to identify any variances.

How Budgets Work

Although the budgeting process for companies can become complex, at its most basic, a budget compares a company's revenue with its expenses in a given period. When they spend more than what was budgeted they can create a revenue deficit .

Of course, determining how much to spend on various expenses and projecting sales is only one part of the process. Company executives also have to contend with a myriad of other factors, including projecting capital expenditures , which are large purchases of fixed assets such as machinery or a new factory. They must also plan for their ongoing cash needs, revenue shortfalls, and the economic backdrop. Regardless of the type of business, the ability to gauge performance using budgets is critical to a company's overall financial health.

Types of Budgets

Below are a few of the most common types of budgets that corporations use to accurately forecast their numbers.

Master Budget

Most companies will start with a master budget, which is a projection for the overall company. Master budgets typically forecast the entire fiscal year. The master budget will include projections for items on the income statement , the balance sheet, and the cash flow statement . These projections can include revenue, expenses, operating costs, sales, and capital expenditures.

Static Budget

A static budget is a budget with numbers based on planned outputs and inputs for each of the firm's divisions. A static budget is usually the first step of budgeting, which determines how much a company has and how much it will spend. The static budget looks at fixed expenses, which are not variable or dependent on production volumes and sales. For example, rent would be a fixed cost regardless of the sales volume for a company.

Some industries such as nonprofits receive donations and grants resulting in a static budget from which they can't exceed. Other industries use static budgets as a starting point or a baseline number, similar to the master budget, and make adjustments at the end of the fiscal year if more or less is needed in the budget. When creating a static budget, managers use economic forecasting methods to determine realistic numbers.

Operating Budget

The operating budget includes the expenses and revenue generated from the day-to-day business operations of the company. The operating budget focuses on the operating expenses, including cost of goods sold (COGS) and the revenue or income. COGS is the cost of direct labor and direct materials that are tied to production.

The operating budget also represents the overhead and administrative costs directly tied to producing the goods and services. However, the operating budget doesn't include items such as capital expenditures and long-term debt.

Cash-Flow Budget

A cash-flow budget helps managers determine the amount of cash being generated by a company during a specific period. The inflows and outflows of cash for a company are important because expenses need to be paid on time from the cash generated. For example, monitoring the collection of accounts receivables , which is money owed by customers, can help companies forecast the cash due in a particular period.

This process can be challenging if too many customers are past-due. To compensate for this, many businesses create something called an " allowance for doubtful accounts ," which estimates the amount of accounts receivable that are expected to not be collectible.

Cash flow budgets help to examine past practices to examine what's working and what's not and make adjustments. For example, a company could apply for a short-term working capital line of credit from a bank to ensure they have cash in the event a client pays late. Also, companies can ask for more flexible options for their accounts payables , which is money owed to suppliers, to help with any short-term cash-flow needs.

Using a Budget To Evaluate Performance

Once a period has ended, management must compare the forecasts from the static or master budget to the company's performance. It's at this stage that companies calculate whether the budget came in line with planned expenditures and income.

Flexible Budget

A flexible budget is a budget containing figures based on actual output. The flexible budget is compared to the company's static budget to identify any variances (or differences) between the forecasted spending and the actual spending.

With a flexible budget, budgeted dollar values (i.e., costs or selling prices) are multiplied by actual units to determine what particular number will be given to a level of output or sales. The calculation yields the total variable costs involved in production. The second component of the flexible budget is the fixed costs. Typically, fixed costs do not differ between static and flexible budgets.

Since flexible budgets use the current period's numbers—sales, revenue, and expenses—they can help create forecasts based on multiple scenarios. Companies can calculate various outcomes based on different outputs, such as sales or units produced. Flexible or variable budgets help managers plan for both low output and high output to help ready themselves regardless of the outcome.

Budget Variances

As stated earlier, variances can arise between the static budget and the actual results. The two common variances are called the flexible budget variance and sales-volume variance.

The flexible budget variance compares the flexible budget to actual results to determine the effects that prices or costs have had on operations. By comparison, the sales-volume variance compares the flexible budget to the static budget to determine the effect that a company's level of sales activity had on its operations.

From these two budgets, a company can develop individual flexible and static budgets for any element of its operations. The variances are classified as either favorable or unfavorable.

If the sales-volume variance is unfavorable (flexible budget is less than static budget), the company's sales (or production with a production volume variance) will turn out to be less than anticipated.

If, however, the flexible budget variance was unfavorable, it would be the result of prices or costs. By knowing where the company is falling short or exceeding the mark, managers can evaluate the company's performance more efficiently and use the findings to make any necessary changes.

A flexible budget can help companies account for both variable and fixed expenses, creating a more dynamic process and leading to more accurate forecasts.

Implementing Budgets

For most companies, expenses pop up from time to time. Static budgets typically act as a guideline, meaning they can be changed or adjusted once the variances have been identified via a flexible budget. Understanding the different types of budgeting , managers can gain a wealth of information through the analysis of budget variances leading to better-informed business decisions.

Mitchell Franklin, Patty Graybeal, Dixon Cooper. “ Principles of Accounting, Volume 2: Managerial Accounting. 7.4 Prepare Flexible Budgets .” OpenStax, 2019.

Mitchell Franklin, Patty Graybeal, Dixon Cooper. “ Principles of Accounting, Volume 2: Managerial Accounting. 8.5 Describe How Companies Use Variance Analysis .” OpenStax, 2019.

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  February 27, 2024

How to create a business budget: 8 simple steps.

No matter the size of your business, a business budget is vital to planning and guiding your business’s growth. By understanding the fixed expenses of a company and accounting for the ebb and flow of work, a proper business budget can help your business maintain itself through the year and create protection around unplanned expenses through well allocated funds. In this guide, we'll walk you through the process of creating a business budget, outlining essential steps to help you manage your finances effectively.

What Is a Business Budget?

A business budget is a financial plan outlining projected revenues and expenses for a business during a specific period of time (most typically a year, though there are often monthly or quarterly reexaminations). Although there are variables throughout the year, a complete and accurate budget will serve as a blueprint for businesses in managing income and expenditures, guiding decision-making processes, and ensuring financial stability. 

What Should a Business Budget Include?

A comprehensive business budget’s purpose is to provide a business a holistic view of their financial health. When looking through bank statements, take note of those expenses that reoccur throughout the year and note those—as well as those unexpected expenses your company should instead anticipate. Key components to include are:

• Revenue Forecast: Anticipated income from sales, services, or other sources after deducting costs, taxes, and other fees.
• Fixed Operating Expenses: Costs associated with running the business, such as rent, utilities, salaries, and supplies.
• Capital Expenditures: Investments in assets like equipment, machinery, or property.
• Debt Service: Payments towards loans, credit lines, or other forms of debt.
• Taxes: Estimated tax liabilities, including income tax, sales tax, and payroll taxes.
• Contingency Funds: Reserves set aside for unexpected expenses or emergencies.
• Profit Targets: Desired levels of profitability, indicating the financial performance you aim to achieve.

Why Is Budgeting Important to a Business?

Budgeting plays a crucial role in the financial management of a business for several reasons:

• Resource Allocation: Helps allocate resources efficiently to prioritize essential activities and investments.
• Financial Control: Provides a framework for monitoring and controlling expenses to prevent overspending.
• Performance Evaluation: Facilitates performance measurement against predetermined targets, enabling timely corrective actions.
• Decision Making: Guides decision-making processes by providing insights into the financial implications of various options.
• Risk Management: Identifies potential risks and allows for proactive mitigation strategies to safeguard financial stability.

How Does Budgeting Help a Business?

Effective budgeting contributes to the success and sustainability of a business in numerous ways:

• Improved Cash Flow Management: Helps maintain adequate cash reserves to meet financial obligations and fund growth initiatives.
• Enhanced Profitability: Enables businesses to identify opportunities for revenue growth and cost optimization, leading to higher profitability.
• Better Resource Utilization: Ensures optimal utilization of resources by aligning expenditures with strategic priorities and operational needs.
• Increased Financial Transparency: Provides stakeholders with a clear understanding of the company's financial health and performance.
• Long-term Planning: Facilitates long-term planning by forecasting future financial requirements and setting achievable goals.

How to Create a Business Budget

Now that we’ve gone over the importance of a business budget, it’s time to understand the steps you need to take in order to create a comprehensive plan.

Gather Financial Information

Start by compiling relevant financial data, including past income statements, balance sheets, and cash flow statements. Analyze historical trends to identify patterns and make informed projections for the upcoming period.

Determine Your Financial Goals

Define clear, measurable financial goals aligned with your business objectives. Whether it's increasing revenue, reducing costs, or improving profitability, setting specific targets will provide a roadmap for your budgeting process.

Identify Revenue Sources

Identify all potential sources of revenue, including sales, services, investments, and other income streams. Estimate the expected revenue for each source based on market trends, historical data, and sales forecasts.

Estimate Expenses

Next, list all anticipated expenses, categorizing them into fixed and variable costs. Fixed expenses, such as rent and salaries, remain constant regardless of business activity, while variable expenses, like supplies and utilities, fluctuate based on demand.

Factor in Contingencies & Emergency Funds

Allocate a portion of your budget for contingencies and emergency funds to cover unforeseen expenses or revenue shortfalls. Building a financial cushion will provide stability and resilience during challenging times.

Balance Your Budget

Balance your budget by ensuring that projected revenues exceed estimated expenses. If there's a deficit, identify areas where you can reduce costs or increase revenue to achieve equilibrium.

Monitor & Track Your Budget

Regularly monitor and track your budget against actual financial performance to identify variances and deviations. Use accounting software or spreadsheets to update your budget and make adjustments as needed to stay on course.

Review & Adjust Budget Regularly

Review your budget periodically, ideally on a quarterly or annual basis, to assess its effectiveness and relevance. Adjust your budget as necessary based on changing market conditions, business priorities, and performance trends.

Contact Mowery & Schoenfeld for Help with Business Budgeting

Creating and managing a business budget requires expertise and strategic planning. At Mowery & Schoenfeld, we specialize in helping businesses develop robust financial strategies to achieve their financial goals. Contact us today to learn how our team of experienced professionals can assist you with business budgeting and financial management. 

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7.3: Introduction to Budgeting and Budgeting Processes

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The budget—For planning and control

Time and money are scarce resources to all individuals and organizations; the efficient and effective use of these resources requires planning. Planning alone, however, is insufficient. Control is also necessary to ensure that plans actually are carried out. A budget is a tool that managers use to plan and control the use of scarce resources. A budget is a plan showing the company’s objectives and how management intends to acquire and use resources to attain those objectives.

A YouTube element has been excluded from this version of the text. You can view it online here: pb.libretexts.org/llmanagerialaccounting/?p=152

Companies, nonprofit organizations, and governmental units use many different types of budgets. Responsibility budgets are designed to judge the performance of an individual segment or manager. Capital budgets evaluate long-term capital projects such as the addition of equipment or the relocation of a plant. This chapter examines the master budget , which consists of a planned operating budget and a financial budget. The planned operating budget helps to plan future earnings and results in a projected income statement. The financial budget helps management plan the financing of assets and results in a projected balance sheet.

The budgeting process involves planning for future profitability because earning a reasonable return on resources used is a primary company objective. A company must devise some method to deal with the uncertainty of the future. A company that does no planning whatsoever chooses to deal with the future by default and can react to events only as they occur. Most businesses, however, devise a blueprint for the actions they will take given the foreseeable events that may occur.

A budget: (1) shows management’s operating plans for the coming periods; (2) formalizes management’s plans in quantitative terms; (3) forces all levels of management to think ahead, anticipate results, and take action to remedy possible poor results; and (4) may motivate individuals to strive to achieve stated goals.

Companies can use budget-to-actual comparisons to evaluate individual performance. For instance, the standard variable cost of producing a personal computer at IBM is a budget figure. This figure can be compared with the actual cost of producing personal computers to help evaluate the performance of the personal computer production managers and employees who produce personal computers. We will do this type of comparison in a later chapter.

Many other benefits result from the preparation and use of budgets. For example: (1) businesses can better coordinate their activities; (2) managers become aware of other managers’ plans; (3) employees become more cost conscious and try to conserve resources; (4) the company reviews its organization plan and changes it when necessary; and (5) managers foster a vision that otherwise might not be developed.

The planning process that results in a formal budget provides an opportunity for various levels of management to think through and commit future plans to writing. In addition, a properly prepared budget allows management to follow the management-by-exception principle by devoting attention to results that deviate significantly from planned levels. For all these reasons, a budget must clearly reflect the expected results.

Failing to budget because of the uncertainty of the future is a poor excuse for not budgeting. In fact, the less stable the conditions, the more necessary and desirable is budgeting, although the process becomes more difficult. Obviously, stable operating conditions permit greater reliance on past experience as a basis for budgeting. Remember, however, that budgets involve more than a company’s past results. Budgets also consider a company’s future plans and express expected activities. As a result, budgeted performance is more useful than past performance as a basis for judging actual results.

A budget should describe management’s assumptions relating to: (1) the state of the economy over the planning horizon; (2) plans for adding, deleting, or changing product lines; (3) the nature of the industry’s competition; and (4) the effects of existing or possible government regulations. If these assumptions change during the budget period, management should analyze the effects of the changes and include this in an evaluation of performance based on actual results.

Budgets are quantitative plans for the future. However, they are based mainly on past experience adjusted for future expectations. Thus, accounting data related to the past play an important part in budget preparation. The accounting system and the budget are closely related. The details of the budget must agree with the company’s ledger accounts. In turn, the accounts must be designed to provide the appropriate information for preparing the budget, financial statements, and interim financial reports to facilitate operational control.

Management should frequently compare accounting data with budgeted projections during the budget period and investigate any differences. Budgeting, however, is not a substitute for good management. Instead, the budget is an important tool of managerial control. Managers make decisions in budget preparation that serve as a plan of action.

The period covered by a budget varies according to the nature of the specific activity involved. Cash budgets may cover a week or a month; sales and production budgets may cover a month, a quarter, or a year; and the general operating budget may cover a quarter or a year.

Budgeting involves the coordination of financial and nonfinancial planning to satisfy organizational goals and objectives. No foolproof method exists for preparing an effective budget. However, budget makers should carefully consider the conditions that follow:

• Top management support All management levels must be aware of the budget’s importance to the company and must know that the budget has top management’s support. Top management, then, must clearly state long-range goals and broad objectives. These goals and objectives must be communicated throughout the organization. Long-range goals include the expected quality of products or services, growth rates in sales and earnings, and percentage-of-market targets. Overemphasis on the mechanics of the budgeting process should be avoided.
• Participation in goal setting Management uses budgets to show how it intends to acquire and use resources to achieve the company’s long-range goals. Employees are more likely to strive toward organizational goals if they participate in setting them and in preparing budgets. Often, employees have significant information that could help in preparing a meaningful budget. Also, employees may be motivated to perform their own functions within budget constraints if they are committed to achieving organizational goals.
• Communicating results People should be promptly and clearly informed of their progress. Effective communication implies (1) timeliness, (2) reasonable accuracy, and (3) improved understanding. Managers should effectively communicate results so employees can make any necessary adjustments in their performance.
• Flexibility If significant basic assumptions underlying the budget change during the year, the planned operating budget should be restated. For control purposes, after the actual level of operations is known, the actual revenues and expenses can be compared to expected performance at that level of operations.
• Follow-up Budget follow-up and data feedback are part of the control aspect of budgetary control. Since the budgets are dealing with projections and estimates for future operating results and financial positions, managers must continuously check their budgets and correct them if necessary. Often management uses performance reports as a follow-up tool to compare actual results with budgeted results.

The term budget has negative connotations for many employees. Often in the past, management has imposed a budget from the top without considering the opinions and feelings of the personnel affected. Such a dictatorial process may result in resistance to the budget. A number of reasons may underlie such resistance, including lack of understanding of the process, concern for status, and an expectation of increased pressure to perform. Employees may believe that the performance evaluation method is unfair or that the goals are unrealistic and unattainable. They may lack confidence in the way accounting figures are generated or may prefer a less formal communication and evaluation system. Often these fears are completely unfounded, but if employees believe these problems exist, it is difficult to accomplish the objectives of budgeting.

Problems encountered with such imposed budgets have led accountants and management to adopt participatory budgeting. Participatory budgeting means that all levels of management responsible for actual performance actively participate in setting operating goals for the coming period. Managers and other employees are more likely to understand, accept, and pursue goals when they are involved in formulating them.

Within a participatory budgeting process, accountants should be compilers or coordinators of the budget, not preparers. They should be on hand during the preparation process to present and explain significant financial data. Accountants must identify the relevant cost data that enables management’s objectives to be quantified in dollars. Accountants are responsible for designing meaningful budget reports. Also, accountants must continually strive to make the accounting system more responsive to managerial needs. That responsiveness, in turn, increases confidence in the accounting system.

Although many companies have used participatory budgeting successfully, it does not always work. Studies have shown that in many organizations, participation in the budget formulation failed to make employees more motivated to achieve budgeted goals. Whether or not participation works depends on management’s leadership style, the attitudes of employees, and the organization’s size and structure. Participation is not the answer to all the problems of budget preparation. However, it is one way to achieve better results in organizations that are receptive to the philosophy of participation.

• Accounting Principles: A Business Perspective. Authored by : James Don Edwards, University of Georgia & Roger H. Hermanson, Georgia State University. Provided by : Endeavour International Corporation. Project : The Global Text Project. License : CC BY: Attribution
• Introduction to Budgeting (Managerial Accounting) . Authored by : Education Unlocked. Located at : youtu.be/pCwLhz0ltlE. License : All Rights Reserved . License Terms : Standard YouTube License

How to Master the Fine Art of Business Planning and Budgeting

Updated on: 5 January 2023

Starting a business is a challenging thing: you have to work hard and do your best to ensure its success. However, the work doesn’t end even when your business actually becomes operational. You still have to do so much more to ensure that it will keep on track.

Of course, it could be hard, especially for the beginners. It seems that you have to keep an eye on so many things and focus on so many urgent tasks every day that there isn’t any time left for business planning and budgeting. However, it is very important to find that time, because business planning and budgeting are actually one of the most important things for business success.

Why so? Because a plan allows you to get a better understanding of how you see your business, how you want to develop it, and so on. When you create a plan, you set targets that you want to achieve as well as define the ways of evaluating the success of your business.

Basically, planning gives you all the necessary tools that you can use to improve your business in the nearest future. However, this happens only when planning is done correctly.

What to Include in Your Annual Plan?

If you want to create a perfect business plan, you have to know what has to be included in it and how big it will be. Of course, there are no strict limitations to a size of a business plan as each business is different. However, if you are doing it for the first time, I recommend starting with a yearly plan: it is not too big and not too short.

A good annual plan has to include the following things:

• an executive summary
• a list of products and services you offer (or plan to offer this year)
• a detailed description of your target market
• a financial plan
• a marketing plan as well as a sales plan
• milestones and metrics
• a description of your management team

In order to write it in the best way possible, you need to spend some time thinking about the current status of your company as well as how it should look like by the end of the year. Describe your target market, think about the goals that have to be achieved this year, about the products and services that have to be launched.

Visualize the information to make it easier for you to see the whole picture (this is especially important for those, who don’t have much experience in planning). You can use charts, and different diagram types such as mind maps to visualize and organize your ideas and plans.

Try choosing a few main goals for your company and add them to the annual plan being as specific as possible: for example, if you want to increase your earnings, you should specify by how much (10%, 15%, etc.). It’s also good to think about the obstacles you might face and come up with some ways to minimize the potential risks that could occur.

Remember that while a business plan has to be specific and detailed when you write it, it shouldn’t remain static by the end of the year. No business is predictable enough for this to happen: you should understand it and prepare to act quickly, adding changes to a business plan if something unexpected happens.

Business Planning Cycle

As I said, typical business planning isn’t a static thing – actually, it’s a cycle that usually looks like this:

• You take some time to evaluate the effectiveness of your business. In order to do so, you should compare its current performance with the last year’s one – or with targets set earlier this year.
• Then you have to think about opportunities that might appear as well as the threats you might face.
• Remember about both successes and failures your business experienced throughout last year. Analyze them and think what can be done to repeat/avoid them.
• Think of the main business goals you would like to achieve and be sure to add them to the new annual plan (or edit the old one according to them).
• Create a budget.
• Come up with budget targets.
• Complete the plan.
• Be sure to review it regularly (every month, every three months, etc.), making changes if necessary.

Repeat the whole cycle.

Business Planning and Budgeting

When a business is still small and growing, it might seem unnecessary to plan its budget. However, it’s crucial if you want to avoid financial risks and be able to invest in opportunities when they appear.

Moreover, with the rapid growth of your business, you might find yourself in a situation where you aren’t able to control all the money anymore. Expansion of the business usually includes the creation of different departments responsible for different things – and each of these departments needs to have its own budget.

As you see, the bigger your business becomes, the more complicated it gets. While it’s okay to not control every cent by yourself, it is still up to you to make sure that your business keeps growing instead of becoming unprofitable. That’s why it’s so important to create a budget plan that allows you to understand the exact income your business brings by the end of the month and the amount of it, you are able to save or spend on different things.

It is important to remember that a business plan is not a forecast in any way. It doesn’t predict how much money you’ll make by the end of the year. Instead, it’s a tool for ensuring that your business will remain profitable even after covering all the necessary expenses.

Moreover, a business plan also ensures that you’ll have the opportunity to invest money into future projects, fund everything that has to be funded this year, and meet all of the business objectives.

Benefits of a Business Budget

The whole budget planning has a lot of benefits:

It allows you to evaluate the success of your business: when you know exactly how much profit your business gave you at the beginning of the year, you are able to compare it with the profit by the end of the year, understanding whether your financial goals have been met or not.

It allows managing money effectively: for example, if you save money for predicted one-time spends, you won’t be caught by surprise by them.

It helps identify the problems before they actually happen: for example, if you evaluate your budget and see that the income left after covering all the expenses is quite small, you’ll understand that you need to make more profit this year.

It helps make smarter decisions, by only investing money that you can afford to invest.

It allows you to manage your business more effectively, allocating more resources to the projects that need them the most.

It helps in increasing staff motivation.

Basically, when you have a budget plan ready, you have your back covered.

How to Create a Budget?

There are so many articles written on how to create a perfect business budget, but most of them narrow down to these 5 simple things:

• Evaluate your sources of income. You have to find out how much money your business brings on a daily basis in order to understand how much money you can afford to invest and spend.
• Make a list of your fixed expenses. These ones repeat every month and their amount doesn’t change. Some people forget to exclude the sum needed to cover these expenses from the monthly income, but it’s important to do so in order to get a clear understanding of your budget.
• Don’t forget about variable expenses. These ones don’t have a fixed price but still have to be paid every month. Come up with an approximate sum you’ll have to pay and include it in your budget.
• Predict your one-time expenses. Every business needs them from time to time, but if you plan your budget forgetting about these expenses, spending money on them could affect it greatly and not in a positive way.
• When you list all the income and expense sources, it’s time to pull them all together. Evaluate how much money you’ll have each month after you cover all these expenses. Then think of what part of that sum you could afford to invest into something.

While a whole process of budget creation might seem too complicated, you still should find time to do it. It’s totally worth the effort – moreover, such a plan could help you not only throughout the next month but also throughout the next year (if your expense and income sources won’t change much).

Of course, it’s still important to review it from time to time, making changes when necessary. However, the review process won’t be as complicated as the creation of a budget plan from scratch.

Key Steps in Drawing up a Budget

If you’ve never created a budget plan before, you could make some budgeting mistakes . However, when it comes to financial planning, the smallest mistake could have a negative impact. The following tips can help you easily avoid most mistakes, making your budget plan more realistic.

• Try to take it slow

The more time you spend on budgeting, the better it is for you. It’s hard to create a flawless budget plan quickly: there’s a big chance you might miss something. That’s why it’s vital to make sure that you’ve listed all the sources of your income and expenses, and are prepared well.

• You can use last year’s data

Last year’s data could help you see the whole picture better: you can compare it with this year’s data, finding out whether your income has increased or decreased. However, you should use it only for comparing and as a guide. You have new goals and resources this year, and the environment you’re working in has changed too, so your current planning and strategies should differ from the ones you used last year.

• Make sure that a budget is realistic

The most important thing about a budget plan is that it has to cover not only predictable expenses but also less predictable ones. Of course, making predictions is hard but using previous data along with some other business plans as examples could make the whole process easier.

A budget also has to be detailed: the information it contains has to allow you to monitor all the key details of your business, be it sales, costs, and so on. You could also use some accounting software for more effective management.

• It’s okay to involve people

If your business is big enough, you probably have some employees responsible for a part of the financial operations. It’s good to involve them in a budget creation process too, using their knowledge and experience to predict some expenses, for example. If the people you involve are experienced enough, the combination of their professionalism and your knowledge will make a budget more realistic and effective.

• Visualizing helps

Various charts and diagrams are so popular in business for a reason: they allow tracking your incomes and expenses easily. For example, you can create one chart based on your plan and another chart based on an actual budget and compare them during planned revisions to see whether your budget plan works just as expected or not.

As I mentioned above, it’s easier to control finances when you are running a small business. Such business needs only one budget that is created for a certain period – in most cases, for a year. Larger businesses, however, require something else. They have various departments, so it is better to create several budgets at once, tailoring each of them to a certain department’s needs.

Don’t Forget to Review!

I’ve already mentioned that a review is an important process of every business planning and budgeting. No matter how good your plan is, it is impossible to predict everything with 100 percent accuracy. Your business will grow and the environment around it will change, so the quicker you’ll react to such changes, the better it is for you.

That’s why you should schedule budget reviews from time to time. I recommend starting with reviewing it every month and then switching to a more comfortable schedule. Every month review can help you notice the flaws of your plan (which is especially important if you don’t have much experience in this kind of thing) as well as understand how stable your business is.

If you see that you don’t have to make changes often, you could start reviewing your plan every three or six months (however, I recommend doing it more often).

You can use various common diagrams to help you . The best thing about diagrams is that they help visualize data well, which is very important when you need to see the whole picture more clearly – and this happens often during budget planning. For example, a diagram or a chart of your company’s income can show you how much your finances have grown during a certain period. Moreover, if you notice certain downfalls in a chart (that aren’t predicted), you’ll be able to react to it quickly, fixing things that went wrong.

What do you need to consider during the whole review process? First, your actual income. Probably it will be different each month: every business has its own peak sales periods and drop sales ones, and you have to find them and remember them for more effective planning next year. It is important to check whether the income matches the one you predicted or not: if not, you have to find out why it happened.

Second, you have to evaluate your actual expenses. See if they differ from your budget, how much do they affect it, why they exceed your expectations (if they do), and so on.

Probably the best thing about reviewing is that it allows you to react to all the unexpected situations quickly, saving your business from the potential troubles and downfalls. So be sure not to skip it.

As you see, writing a business plan is a complex process. You have to be very attentive, to plan everything, starting with your goals and ending with your expenses, to consider so many things and to involve other people in planning if possible. Moreover, you also have to learn all the time, reviewing your plans, making changes, finding the ways to react to unexpected situations.

But while this might look like a tough thing to do, it is very convenient for everyone who wants to manage their business successfully. The planning takes a lot off your shoulders and makes the whole business running process easier. You are able to evaluate the effectiveness of your business by looking at the monthly income increase, at the goals you wanted to achieve, and so on. You are also able to predict the potential downfalls of your business and to use the tools you have to minimize all the risks.

You are able to evaluate the effectiveness of your business by looking at the monthly income increase, at the goals you wanted to achieve, and so on. You are also able to predict the potential downfalls of your business and to use the tools you have to minimize all the risks.

I hope that this guide will help you create strong and realistic budget and business plans, and successfully implement them in running your business. If you have some tips on business and budget planning that you want to share, please do so in the comment section below!

Author’s Bio:

Kevin Nelson started his career as a research analyst and has changed his sphere of activity to writing services and content marketing. Apart from writing, he spends a lot of time reading psychology and management literature searching for the keystones of motivation ideas. Feel free to connect with him on Facebook , Twitter , Google+ , Linkedin .

Join over thousands of organizations that use Creately to brainstorm, plan, analyze, and execute their projects successfully.

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The Budgeting Process in Business & Project Management

There’s one thing that all businesses have in common with project management: money. Without funding and the proper budgeting process, projects in any industry grind to a halt. Budgeting is how those funds are spent.

But first, let’s define what a budget is and explore the types of budgets and methods for making a budget. By understanding the budgeting process for business and project management , it’s easier to understand how to make a budget for your company or project.

What Is a Budget?

A budget is an estimate of the revenue and expenses that occur over a period of time. It’s a living document that’s reviewed and revised periodically. Any enterprise that spends money will use a budget to manage its costs, whether this is a business, project, governmental agency or even a personal household.

Another way to look at a budget is as a financial plan. It plans your spending over a specific timeframe. Using a budget is essential to undertaking any financial endeavor successfully. This is why there are corporate budgets, project budgets and government-created budgets to support various services.

A budget process outlines the resources needed for managing a business or project, but that’s not all a budget can do. It’s a tool for setting goals over the quarter or year, measuring outcomes and planning for contingencies. Whether you’re running a business or managing a project, project management software can help you plan, manage and track your budget.

ProjectManager is award-winning project management software with robust Gantt charts that help you manage resources and costs in real time. You can organize your tasks and attach resources and costs to each. Link dependencies to avoid costly delays and even filter for the critical path to know which tasks are essential to project success. Once you set a baseline, you can then track your planned costs against actual costs in real time. Get started with ProjectManager today for free.

Types of Budgets

Considering that budgets can apply to so many diverse entities, it’s no surprise that there are many different types of budgets. Each of these budgets helps guide spending over the year so you don’t overspend. They’re crucial to making important financial decisions, but they differ based on various business and project needs.

Project Budget

A project budget is used to estimate the costs of a project. It’s created by the project manager and used to track costs throughout the execution phase of the project and make any adjustments that’ll keep the project on track financially. The project budget breaks down costs to individual tasks and the resources required to complete them.

Master Budget

As the name suggests, the master budget is made up of all the individual budgets, such as sales, production, etc., that are used in a business. This is done to provide a full financial picture of the company and show how particular income and expenses fit in the business. A master budget is more commonly found in larger businesses, though a smaller company can use them to look at finances by category or department.

Operating Budget

An operating budget lists all the expenses and revenues a business estimates for its monthly or yearly operations. This is a way to understand how much money you need to operate your business well. The operating budget is made up of fixed costs and variable costs, revenue and unexpected expenses. They’re a combination of sales and production budgets, direct materials and labor and overhead and administrative expenses.

Related: Free Operating Budget Template for Excel

Sales Budget

The sales budget is concerned with estimating the revenue you expect to generate from sales and expenses over a period of time. By creating a sales budget, you can plan your spending and adjust it as needed. The more accurate your sales budget, the better you can ensure that you have the materials and inventory on hand to meet customer demand.

Financial Budget

A financial budget is used to determine how much money you need to achieve your short-term and long-term goals. It does this by looking at your assets, liabilities and equity. When this is done, you have a snapshot of your business’s health and whether it’s stable. A financial budget is often used when a business is looking for funding or positioning itself for an initial public offering (IPO).

Cash Flow Budget

Knowing the money that goes in and out of your business over a period of time is important, and a cash flow budget helps forecast that cash flow. Knowing your cash flow is critical to making important financial decisions, but it also helps find issues and prevent overspending. Ideally, you want to ensure that there’s enough money coming in to cover the money going out of your business. Negative cash flow is when you don’t have enough money to cover offset expenses.

Budgeting Methods

Budgeting methods are how you implement a budgeting process. Just as there are many types of budgets, there are many budgeting methods. And, as with the types of budgets, there’s not one right choice. You have to make that decision based on spending habits and strategic planning . Here are four budgeting methods to help you get started.

Zero Based Budgeting

Zero-based budgeting is simply income minus expenses equals zero. It’s one of the more common budgeting methods and starts with the assumption that all budgets are zero and are rebuilt from scratch. This creates a very tight budget and avoids any expenditures that aren’t necessary for a business’s success. It’s a bottom-up budgeting method that’s used for cost containment, but it’s time-consuming.

Incremental Budgeting

An incremental budget works by using the previous year’s actual figures and adding or subtracting a percentage of that to determine the current year’s budget. It’s a very common budgeting method as it’s simple and best used when primary cost drivers are unchanged from year to year. But it can perpetuate inefficiencies, result in budgetary slack and ignore external drivers of activity and performance.

Activity-Based Budgeting

Activity-based budgeting is a top-down approach. It determines the amount of inputs that are needed to support the outputs set by the business. The activities that incur costs are recorded, analyzed and researched. It’s a rigorous budgeting method that helps to reduce production costs while increasing production efficiencies and determines how to make products more cost-friendly.

Value Proposition Budgeting

When using value proposition budgeting, you’ll ask yourself why is this included in the budget, does it create value for the customer, staff or stakeholders and is the value of that item greater than its cost? If it’s not, what’s your justification for the cost? Asking these questions ensures that everything in your budget delivers value to your customers.

How to Make a Budget for a Project or Business in 6 Simple Steps

A budgeting process begins with making the budget. Whether you’re managing a business or a project, these are the six steps to follow to create a budget.

1. Choose a Budgeting Approach

As illustrated above, there are many approaches to making a budget. The budgeting process that’s right for you is the first step in defining your business or project budget . Look at your current financial situation and what your priorities are and choose a budget approach that matches your financial goals.

2. Define the Purpose of Your Budget

Again, there are various reasons for a budget such as a sales budget, operating budget, etc. Before you can start, you have to know what kind of budget you’re making. That’ll guide you through the budgeting process.

3. Make an Action Plan

Now that you have a method and a purpose, it’s time to create an action plan , which is the steps that’ll lead you to a completed budget. You’ll want to define the scope, such as the goals and planned deliverables. Then you’ll want to put this on a timeline to track your budget over a specific period.

4. Estimate Fixed and Variable Costs

First, fixed costs are those that aren’t changed such as your rent, utility bills, salaried payroll, insurance, interest on loans, property taxes, etc. Variable costs are those that can change, such as raw materials, labor, sales commissions, shipping, etc. Together, these will make up a great deal of your budget.

5. Estimate Expected Revenue

The expected revenue is the amount of money a company estimates it’ll generate from sales. It can be as simple as the number of units sold multiplied by how much were sold. But revenue doesn’t account for costs and expenses. Use historical data and market research to estimate what you expect to earn over the budgetary period.

6. Create a Contingency Fund

As you can see, all these figures are estimations. They should be as accurate as possible and based on research and data, but they’re not a given. That’s why it’s so important to have a contingency fund when creating a budget. It’s a sum of money put aside to compensate for the inaccuracy inherent in estimating costs and revenue in a budget as well as covering for risk.

How ProjectManager Helps With the Budgeting Process

ProjectManager is award-winning software that helps with the budgeting process. When you start a project either by importing an Excel or Microsoft Project file or by using one of our industry-specific templates, you can set the project budget. We’ve shown how you can plan your budget on Gantt charts that organize your tasks and their associated resources and costs. But there’s much more you can do to manage and track your costs throughout the project life cycle.

Monitor Costs With Real-Time Dashboards

Use Timesheets and Workload Chart to Track Resources

Resources are anything you use to get your work done, from labor to materials and everything in between. It’s important to track your resources to keep to your budget, and our tool has resource management features that make it easy. When you onboard the team, you can add their availability, including PTO, vacations and global holidays, which makes it easier to assign them work. Our secure timesheets streamline payroll and allow you to view where each team member is in terms of completing their tasks so you can see if they’re on schedule. There’s also a color-coded workload chart that shows if anyone is overallocated. You can balance workloads right from the chart to keep them working at capacity without the expense of overtime.

Our resource management features help you stay on budget as do our task and risk management tools. If your team falls behind, that means extra money and issues can sidetrack your project and negatively impact the budget. Using our reporting features allows you to go deeper into the data than the dashboard and keep track of project status, variance and more. All reports are customizable to filter only the information you want to see and can be easily shared with stakeholders, who have a vested interest in your project.

ProjectManager is online project management software that helps plan, manage and track budgets in real time. Our collaborative platform allows you to share files, comment and more, connecting everyone regardless of whether they’re in the next office or a different location. Join teams at Avis, Nestle and Siemens who use our software to deliver success. Get started with ProjectManager today for free.

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Why Is Budgeting Important in Business? 5 Reasons

• 06 Jul 2022

There are few skills as critical to running a business as budgeting. Yet, over half of the executives surveyed in a 2019 McKinsey study report feeling dissatisfied with the transparency surrounding their organizations’ budgets.

Any employee—especially managers—should understand budgeting and how it can profoundly impact an organization.

Here’s a primer on the importance of budgeting in business.

Access your free e-book today.

What Is Business Budgeting?

Budgeting is the process of preparing and overseeing a financial document that estimates income and expenses for a period. For business owners, executives, and managers, budgeting is a key skill for ensuring organizations and teams have the resources to execute initiatives and reach goals.

A basic budget consists of projected income and expenses for a given period (for instance, the upcoming quarter or year). After expenses are subtracted from projected income, the leftover money can be allocated to projects and initiatives, ensuring you’re not planning to overspend.

Budgets from previous periods can be compared to the company’s actual financial allocation and performance, giving an idea of how close predictions were to actual spend.

For example, imagine you allocated $10 million for your company’s annual corporate social responsibility (CSR) project. Unforeseen circumstances caused it to run $1 million over budget, and that money had to come out of other projects’ budgets.

During the project’s postmortem, you ask questions like, “Why did we run over budget? Was this an issue of inefficiency or misallocation?” When creating the budget for next year, you use those insights to tighten the process and keep the project’s spend at $10 million or more accurately allocate funds to other projects.

Types of Budgeting

There are several budgeting types that each prioritize different factors when approaching a financial plan. These include:

• Zero-based budgeting , which sets each item at zero dollars at the start of periods before reallocating
• Static budgeting or incremental-based budgeting , which uses historical data to add or subtract a percentage from the previous period to create the upcoming period’s budget
• Performance-based budgeting , which emphasizes the cash flow per unit of product or service
• Activity-based budgeting , which starts with the company’s goals and works backward to determine the cost of attaining them
• Value proposition budgeting , which assumes no line item should be included in the budget unless it directly provides value to the organization

The right budgeting type varies by company and situation. If your organization is in financial distress, the zero-based method may be the best fit, as it starts from scratch each period. Trying out several methods is a good way to determine which is ideal; when doing so, ensure your entire organization is aligned.

Related: 6 Budgeting Tips for Managers

Why Is Budgeting Important?

Budgeting involves number-crunching, attention to detail, and making informed decisions about fund allocation—but it’s well worth the effort. Here are five reasons budgeting is important in business.

1. It Ensures Resource Availability

At its core, budgeting’s primary function is to ensure an organization has enough resources to meet its goals. By planning financials in advance, you can determine which teams and initiatives require more resources and areas where you can cut back.

If, for instance, your team needs to hire an additional employee to scale efforts, budgeting for that in advance can allow you to plan other spending.

2. It Can Help Set and Report on Internal Goals

Budgeting for an upcoming period isn’t just about allocating spend; it’s also about determining how much revenue is needed to reach company goals.

You can use budgeting to set company-wide and team financial goals that align with them. This is especially prominent when using activity-based budgeting, but it’s beneficial no matter which type you use.

Financial goals should be attainable enough that you count on them to inform the rest of your budget allocations. Your goals inform the expenses needed to reach them and vice versa.

You can also use budgeting to update employees on progress and revisit the next period’s goals. For instance, if your company aimed to gain 10,000 new users this past year but fell short by 4,000, what could you have done differently? Does the initiative require fund redistribution? What resources could have propelled progress?

Tracking progress, or lack thereof, allows you to align your team and plan for growth in the next period.

3. It Helps Prioritize Projects

A byproduct of the budgeting process is that it requires prioritizing projects and initiatives. When prioritizing, consider the potential return on investment for each project, how each aligns with your company’s values, and the extent they could impact broader financial goals.

The value proposition budgeting method forces you to determine and explain each line item's value to your organization, which can be useful for prioritizing tasks and larger initiatives.

4. It Can Lead to Financing Opportunities

If you work at a startup or are considering seeking outside investors , it’s important to have documented budgetary information. When deciding whether to fund a company, investors highly value its current, past, and predicted financial performance.

Providing documents for previous periods with budgeted and actual spend can show your ability to handle a company’s finances, allocate funds, and pivot when appropriate. Some investors may ask for your current budget to see your predicted performance and priorities based on it.

5. It Provides a Pivotable Plan

A budget is a financial roadmap for the upcoming period; if all goes according to plan, it shows how much should be earned and spent on specific items.

Yet, the business world is anything but predictable. Circumstances outside your control can impact your revenue or cause priorities to change at a moment’s notice.

Consider the onset of the coronavirus (COVID-19) pandemic in 2020. The economic impact of travel bans, lockdowns, and other safety precautions was far-reaching and unexpected. Executives were forced to quickly—yet thoughtfully—rework budgets to account for major losses and newfound safety concerns.

More than two years later, executives are rethinking their budgeting procedures to make it easier to pivot if needed. One shift noted by McKinsey is the turn toward zero-based budgeting to determine the minimum resources necessary to survive as a business—should the circumstances call for it.

A budget gives you a plan; maintaining an agile mindset enables you to pivot that plan and help lead your organization through turbulent times.

Learn to Budget Effectively

Anyone can learn to budget effectively and reap the benefits. To build a foundation of financial literacy , gain a deeper understanding of the levers that impact an organization’s finances, and discover how budgeting can enable you to become a better leader and manager, consider taking an online financial accounting course .

Do you want to take your career to the next level? Explore Financial Accounting —one of three online courses comprising our Credential of Readiness (CORe) program —which teaches the key financial topics needed to understand business performance and potential. Not sure which course is right for you? Download our free flowchart .

About the Author

Budget Management: Techniques and Tips for Businesses

Being able to manage budgets effectively is the key to running a successful business. Budget management takes place at all levels of an organisation, from the C-suite all the way down to individual teams, who control things like digital marketing budget or budgets for team building activities.

There are a number of different methods or ‘philosophies’ that businesses adopt when managing budgets. Each one approaches business spending slightly differently, and has its own benefits for businesses of different sizes or structures.

Being able to manage a budget is also a fundamental skill that managers need to acquire as they move up the ranks within a business. In this article we’ll cover everything you and your business needs to know about budget management:

• What effective budget management means for businesses
• The most popular budget management strategies
• What skills employees need to be effective budget managers
• How software can aid businesses in their budget management

What is budget management?

Budget management is a fundamental business process aimed at controlling spending in relation to a predefined budget. It involves a wide range of separate processes, and is carried out at various different levels of business.

Broadly speaking, budget management can be broken down into the following activities:

Budget planning

Budget planning is the first step in the budget management process. The budget planning process varies significantly depending on the budgeting strategy in place, as we’ll explain later. But budget planning sets the stage for all other budget management processes by outlining how much money can be spent, and on what. Once the budget has been outlined, it needs to be approved by the relevant manager or department head. Top level business budgets are usually approved by the CFO /CEO and then go to the board of directors for final review and approval.

Implementation

Budget implementation is an ongoing process which takes place throughout the budgeting period. While the general guidelines for budget implementation are often outlined in the budget, many of the specific operational details are put into place on an ad hoc basis.

Budget Trackers: More control & visibility

Budget monitoring and controlling

As budgets are spent they have to be continuously monitored and controlled to ensure that:

• Spending doesn’t exceed the budget
• The spending achieves the desired strategic and operational objectives

Budget monitoring involves tracking expenditure and incoming cash flows and comparing them to the budget. If the figures are off, corrections are made to get the budget back on track. This may mean reducing spending, or increasing spending if business has been stronger than expected. 

Budget reporting

Budget reporting is an important part of the general financial reporting process. It outlines how actual spending lines up to the predetermined budget, and offers granular insights about exactly where funds have been spent. Central budget reporting is usually carried out by the financial controller or another senior member of the finance department.

Budget reports also play an important role in financial planning and analysis (FP&A) , and general strategic planning by giving decision makers accurate insights about how to control spend .

Budget revision and auditing

The final stage of the budget management process is budget revision. This involves comparing your actual expenditure with your budget at the end of the budget period. The main objective is to identify and understand shortfalls in your budget so you can rectify them in the next budget planning process.

Internal and external budget auditing also happens alongside the review process. It ensures that the budgeting process was reported and carried out correctly, and plays an important role in combating financial fraud.

Different approaches to budget management

There are many different business budget strategies, each of which brings their own pros and cons. We’ll go through a few of the most well established approaches towards budget management below:

Hierarchical budget management

The most conventional approach toward budget management treats budgets with a top-down hierarchy. It outlines a clear structural relationship between all budgets in a business where higher level budgets cascade down into more specialised budgets for individual departments or business activities.

Each budget is planned and controlled at the respective departmental level, with approval coming from the level above. In general, this budgeting process takes place at three different levels:

• Corporate level budget

This is the overall budget for the entire business. It is outlined by the company’s top-level management and is structured to help the business achieve its core strategic objectives.

• Department level budgets

Within the business’s overall budget, each department is assigned its own budget to cover expenses and initiatives that have been planned for the year.

• Project level budgets

Each business department or unit will then create budgets for specific projects or activities that they carry out.

This structure is generally applicable to businesses above a certain size. However, in reality many businesses’ budget hierarchy is much more complex.

Bottom-up budgeting

Bottom-up budgeting sets budgetary requirements from the bottom of the company, and uses these requirements to outline the overall budget for the business. This budgeting strategy requires each department to evaluate their needs for the upcoming budgeting period, and outline their expected/requested budget.

Budget-Tracker: Mehr Kontrolle & Transparenz

Zero-based budgeting (ZBB)

Zero-based budgeting is another popular budgeting technique that requires each cost within the business to be justified before a budget is approved. It starts from the ‘zero’ point, i.e. a blank budget, and builds costs after requirements for the upcoming budgeting period have been outlined.

In this sense it is the opposite of the standard budgeting method, where budgets are outlined first, and relevant activities and expenses are altered to fit into the budget that has been allocated.

Zero-based budgeting is significantly more time consuming than normal budgeting, because it requires extensive, in-depth analysis of business needs before building a budget. However, it can result in notable savings, as the business only spends what it has already decided it needs, and its needs are calculated without any relation to the previous budgeting period.

Flexible budgeting

Flexible budgeting, as the name suggests, involves continuous adaptation and budget tuning throughout the budgeting period. This specific budgeting technique allows businesses to be more flexible and adapt to changing market conditions which can impact revenue and costs.

To make flexible budgeting work, you have to be on the ball and ready to change spending habits quickly in response to external factors. But it can be a powerful tool, especially for rapidly growing businesses and businesses in unpredictable markets.

Incremental budgeting

Incremental budgeting uses the current budget as a baseline and applies incremental increases for the new budgeting period. Increases are applied taking into account expected additional costs, including inflation, salary increases, marketing growth etc. While incremental budgeting is conservative and not very well suited to growth, it can save significant amounts of time by using previous budgets as building blocks for new budgets.

What does a budget manager do?

Rather than being a specific job position, budget management tends to be a responsibility that falls within the scope of many different jobs. Some businesses do hire budget managers whose sole purpose is to manage and monitor a specific budget or group of budgets. But the task of managing a budget can technically fall to any employee. 

As we mentioned earlier, budget management takes place at all levels of a business. The higher up the budget hierarchy a specific budget lies, the more complex the processes and workflows involved in budget management are.

For example, managing the budget for an individual team’s monthly social activities would be very simple. The budget would be outlined by the department, and a budget owner would calculate what the team could afford, usually on a per-person basis.

However, the higher up the budget hierarchy you go, the more work there is involved in managing a budget. Dependencies, stakeholders, processes and the amount of money included in the budget all increase significantly.

How to manage a budget effectively

Managing a budget effectively can be tricky, especially in an uncertain economy. New or growing businesses often struggle to budget effectively because they lack experience in their specific niche or market.

However, there are some quick and easy ways to improve the way you manage budgets. The first is to understand the impact of discretionary spending on your overall budget. Discretionary spending is spending that is non-essential to the survival of your business. What is classed as discretionary varies from business to business, but common examples include things like marketing costs and employee perks. Discretionary spending should be the first target for cost cutting if you need to reduce your outgoing expenses.

Businesses also need real-time spend insights to understand exactly where their budgets are going, and the best ways to alter their spending to cut costs. Going over budget can cause your burn rate to increase, and ultimately threaten the survival of your business. Software tools can be a game changer when it comes to budget management, because they provide real-time data about budget progress, as well as immediate, granular control over budget projections and forecasts,

Managing your budget with Moss

As we mentioned above, to manage a budget as effectively as possible, you need to be equipped with the right tools. Nowadays budget management can be automated and improved with the help of technology, and our spend management platform was built to do just that.

Moss smart corporate credit cards give our customers unprecedented control over their spend with real time insights about how much is being spent by each person in your business. You can set individual budgets and spend rules for each card, and allocate them to individual projects or teams within your business. This way you can reduce admin time in approving funds, and limit spending in a way that aids your specific budgeting strategy.

With Moss you can access real time budget controls , which enable you to fine tune every card within your organisation and approve every item that has been bought directly from the Moss app.

Budget management is the overseeing of a pot of funds that have been earmarked for a specific purpose, or purposes. There are many different approaches towards budget creation and budget management, each of which has pros and cons for businesses of different sizes.

The best approach towards budget management depends on: a) The business and business structure in question b) The purpose of the specific budget (i.e. marketing budget or office expansion budget) c) The preferences and strengths of the person in charge of that budget

Zero based budgeting is a budgeting strategy which starts the planning process from the ‘zero point’. In other words, every budget is built from scratch and each budget item has to be justified before approval. Zero based budgeting can help keep costs down, but it’s time consuming and requires a lot of input from all corners of a business.

Generally, budget managers are responsible for planning, implementing, managing and reviewing budgets. However, these responsibilities vary significantly depending on the size and importance of the budget in question. Often, budget management is carried out by managers throughout an organisation who don’t necessarily have any formal financial training, e.g. team leads.

Budget planning is the process of building a budget that will enable a business achieve specific strategic objectives. There are many different approaches to budget planning, each of which have different pros and cons when it comes to accuracy, cost and ease of execution. Examples include flexible budgeting and zero-based budgeting.

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An Agile Approach to Budgeting

• Steve Berez

Featuring Bain & Company partners Sarah Elk and Steve Berez, coauthors of Doing Agile Right: Transformation Without Chaos The uncertainties due to the pandemic are making the annual budgeting and planning process especially challenging.  But even in typical times, most planning and budgeting processes are frustrating. They start five or six months early with promises […]

Featuring Bain & Company partners Sarah Elk and Steve Berez , coauthors of Doing Agile Right: Transformation Without Chaos

The uncertainties due to the pandemic are making the annual budgeting and planning process especially challenging.  But even in typical times, most planning and budgeting processes are frustrating. They start five or six months early with promises of visionary transformations that quickly give way to tedious templates, endless financial forecasts, and leaders haggling over targets and battling for resources.

Sarah Elk and Steve Berez of Bain & Company have found that instead of the conventional predict, command, and control approach to planning and budgeting, companies should focus instead on learning, adapting, and growing.

On November 11 th , 2020, in a live HBR webinar, Elk and Berez will discuss why now is the time for companies to move to an agile approach to planning which includes:

• Changing the purpose of planning and budgeting
• Shifting the focus from financial precision to strategic success
• Planning faster and more frequently

Elk and Berez will go into detail on each focus area and will show how to make the transition to a budgeting and planning process that centers on what truly creates value. Join Elk, Berez, and HBR on November 11 th to learn more.

• Sarah Elk is a partner in Bain & Company’s Chicago office and heads its global operating model practice. She is also a co-author of Doing Agile Right: Transformation Without Chaos (Harvard Business Review Press, 2020).
• Steve Berez  is a partner in Bain & Company’s Boston office and a founder of its enterprise technology practice. He is also a co-author of Doing Agile Right: Transformation Without Chaos (Harvard Business Review Press, 2020).

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A Step-by-Step Overview of Budgeting Process

The budgeting process is often considered a long and tedious one that requires gathering, consolidation, and analysis of data from multiple sources. There is much more to the budgeting process than simple data consolidation, you have to answer several questions, piece together missing information, and consult multiple teams to arrive at the perfect budget. If you are going to do all this manually, then you are signing up for a cumbersome task.

Automating repetitive budgeting process steps is an effective way of streamlining the budgeting process. We have explored various steps in the process of budgeting and ways to automate the budgeting process in this blog.

Table of Contents

Overview of the budgeting process.

Budgets play an important role in the financial planning and forecasting of a business.

What is The Budgeting Process?

Simply put, budgeting is the tactical implementation of a business plan. A detailed and descriptive road map of the business plan that sets various measures and indicators of performance is required for every business. The process of budgeting helps chalk out a detailed road map for the business. 

• Once a budget is prepared, the process teams get a clear picture of goals and objectives and the performance indicators to measure the progress.
• Finance teams review past budgets and plan expenses for forecasting revenue during the budgeting in process .
• The process of budgeting must align with the upper management while analyzing the budget data and establishing future goals for better control of spending.

The process of drafting a budget focuses on allocating resources (mainly financial) to certain company projects and objectives.

Budgets are formulated to enforce budgeting policies and prevent overspending within the organization. 

Reviewing past budgets is an effective way to gain a more accurate picture for creating current budgets. Finance teams get a better understanding of what worked and what didn’t by reviewing past budgets. The budgeting process encompasses all the steps taken by organizations to prepare and execute budgets for a specific period.

Senior executives and managers are often involved in the budgeting process for assigning specific amounts to spend on different expenses. The budget is the final step in the execution of the business plan. Any deviation or inaccuracy in the budgeting process results in cash flow issues for the organization.

The main areas of focus while preparing the budget are:

1. objectives.

These are basically business goals that are developed at a high-level strategy at the beginning of the business. For example, increasing the amount spent by each customer at your retail store is a business objective. 

2. Strategies

These are ways in which you plan to achieve objectives. Organizations may develop one or more strategies to achieve business goals. Customer spending can be increased by expanding product offerings or promotions or sourcing new suppliers. 

Once strategies are framed and implemented, the next step is to evaluate the effectiveness of these strategies. For effective evaluation, you need to set specific evaluation criteria or performance indicators. Performance indicators like average weekly spending per customer or average price changes can be considered while evaluating the effectiveness of strategies. 

Setting quantifiable and time-based targets for specific budgeting periods is important in the budgeting process. The process or project team must aim at reaching/achieving these targets by the end of the budgeting period. Increasing the volume of sales in certain products by a certain time can be considered a target.

Budgeting Process Goals

Now that we have understood what the budgeting process is, let us go onto the goals of budgeting. The main objective of budgeting is to help in financial planning.

There are other goals of the budgeting process, as mentioned below- 

Plan actual operations

The process managers can use the budgeting process to consider how process conditions change and the steps to be taken to improve process efficiencies . A well-planned budget allows managers to understand how to address issues as they arise. 

Coordinate organizational activities

The budgeting process encourages managers to build relationships with other parts of business operations, and understand interdepartmental interactions. Well-coordinated departmental activities support the overall growth of the organization. 

Communicate plans to managers

Budgets are tools to communicate project plans to the entire team so that everyone gets a clear understanding of the role they play in the organization. Budgets also encourage communication of individual goals, plans, and initiatives, all of which roll up together to support the growth of the business. Clear communication also ensures that appropriate individuals are made accountable for implementing the budget. 

Motivate managers to achieve budget goals

The budgeting process enables managers to focus on participation in the process. A budget provides a challenge or target for individuals and managers by linking their compensation and performance relative to the budget. Managers can use budgets to evaluate their performance relative to the targets they have set.

Facilitate funding

Budgets set targets for costs and revenues, which guides teams to tailor their work to achieve these goals. Budgets are vital for businesses that receive funding from capital firms because they would want to know how their investment is spent. Budgets also help investors see what you have made and how you have followed budgets in the past. 

Avoid difficult conversations

Individuals have exciting ideas and campaigns they want to implement. While this should be encouraged, budgets act like checkpoints that keep expectations in check by giving firm numbers. 

Types of Budgets

Budgets help companies keep track of timing and amounts of income and expenditures. It also allows them to set realistic goals, track deviations in planning, and enforce corrective action as and when required. A robust budget framework is built around a master budget consisting of operating budgets, capital expenditure budgets, and cash budgets.

Knowing the type of budget is important to understand the budgeting process that should be followed by your business. 

1. Operating Budget

The operating budget includes revenues and associated expenses in the daily operations of the business. This budget includes employee salaries and benefits, and non-salary expenses. 

2. Capital Budget

Any major purchase made by the business is covered by the capital budget. Typically, requests for large assets like property, equipment, or IT systems create a significant impact on the organization’s cash flow. The purposes of capital budgeting are to allocate funds, mitigate risks in decision-making, and set financial priorities. 

3. Cash Budget

Cash budgets tie the operating and capital budgets and account for the timing of payments and timing receipt of cash from revenues. Management helps management track and manage the company’s cash flow effectively by assessing whether additional capital is needed for raising money, or if there is excess capital. 

Businesses can use the right type of budget based on the type of operations within the department. 

Phases in the Budgeting Process

The entire budgeting process involves 4 phases – preparation, approval, execution, and evaluation. Let us look into each of these phases in detail – 

Preparation

Preparing the budget is the first and most crucial phase in the budgeting process. Reviewing existing financial information is the first preparatory step in budget preparation. The past budgets must be reviewed on the basis of – was the spending as per the past budget; were the forecasted growth targets were met; whether were there any difficulties in executing the budget, and if so, how were they tackled; and were there any unexpected barriers and how were they tackled.

Collaborating with various department heads is a good way to gather information on the above points. Once input is received, you can begin calculating the revenue expected from the business. Identify all the revenue streams and calculate the gross profit. Reviewing cash flow, setting fixed costs, accounting for variable expenses, and forecasting any additional one-off expenses, are all part of the budget preparation phase. 

Once the budget parameters have been set, it is time to get through the approval process. To get speedy approval on the budget, it is important to address all the concerns or queries that the stakeholders may have during the preparatory phase itself.

Automating the budgeting workflow approval is a great way to speed up the whole budgeting process . Workflow automation provides a convenient and trackable way for all stakeholders to review and approve the budget. Automated approvals ensure the right sign-off at every stage of the approval process, and a contingency plan via alternative workflows when the approver is not available. Digital copies of approval sign-offs let you create a clear data trail for audits. 

Once the budget is approved, the funds allotted to various departments can be distributed. The chief financial officer (CFO) or the company controller is tasked with the responsibility of disbursing the funds. Here again, automated workflows can be used to ensure that funds are distributed to the correct business area. Following this method not only helps cut down on waste but also helps process owners track unspent funds effectively and issue warnings in case of overspending. 

Periodic evaluation of the expenses is a must in the budgeting process. Process owners need to be on top of the expenses and compare it with the allowed amount as per the budget. Automating budgeting process steps with appropriate workflows makes it easy to track and report expenses. By integrating the workflow platform with an ERP system, additional data can be extracted as well. The finance department also benefits from a central repository that makes report generation super easy by using automated workflows. 

Best Practices in the Budgeting Process

The budgeting process usually begins 4-6 months prior to the financial year, some businesses however, take the entire fiscal year to complete the process. Most companies set budgets and undertake variance analysis on a monthly basis. There are several steps in the budgeting process before the final budget is implemented.

Common steps include

• Communicating within executive management
• Establishing targets and objectives
• Developing a detailed budget, compilation, and revision of the budget model
• Reviewing and approval by the budget committee

Let us go through the steps in the budgeting process.

1. Review of the previous budget

A review of the existing information in hand is a good way to start the budgeting process. The best evidence for how your new budget should play out is the previous budget.

The previous budget should be evaluated on the following points –  

• Was the spend more or less than the anticipated amount?
• Were your assumptions about the industry and your business growth accurate?
• Were there any unexpected events or shortfalls, and what caused them?
• Was it easy to enforce the budget? Did team members follow it?

This review must be carried out at a high level throughout the organization, and encourage individual budget managers to review budgets within their organization. At this stage, it is crucial to consult other team leaders as well. Best budgets are collaborative and you need to know how well the previous budget worked for stakeholders. 

2. Calculate existing revenue

The starting point for any budgeting exercise is to figure out how much will spend amount to. At the organizational level, you need to identify the income streams. How much is the gross income? To determine this, you need to list your core products, their pricing, and the expected turnover volumes for each product in the coming year.

This is an approximate value, hence, will not give a precise figure. In the case of start-up businesses, the investor capital or venture debt is spent. In this case, the burn rate that you are comfortable with needs to be identified. The amount of total investment that you are able to commit for each period of time should be determined while calculating existing revenue. 

3. Set fixed costs

Fixed costs also referred to as overhead costs, are those over which you have little or no control. These costs are not affected by your sales volumes. The success or failure of the business does not affect the fixed costs that you will need to shell out anyway.

Fixed costs include –

• Rent or mortgage payments for workspaces
• Website hosting and servers
• Insurance policy premiums
• Employee salaries
• Loan interests or installments
• Utility payments such as electricity and internet

Planning for fixed costs becomes easy when you know the employee headcount for the year, and sort out the office space and insurance policies. 

4. Calculate variable costs

As the name suggests, these costs vary according to business operations. These are discretionary costs that are more fluid and can be tinkered with. Variable costs come up on a need basis.

Some examples of variable costs are –

• Marketing and advertising campaigns
• Corporate investments and donations
• Travel and client meetings
• Software subscriptions
• Office decor and renovations

Discretionary costs do not necessarily mean that these costs are frivolous or unnecessary. For example, marketing costs are required for business growth, and team perks can be key contributors to employee engagement, both are necessary variable costs. Variable costs need to be justified more critically while building a business budget. Whenever there is an overshoot in a budget, variable costs are the first to be cut. 

5. Forecast additional spending

Some business expenses are beyond the horizon. A series of acquisitions or mergers, special business events that occur rarely, or consulting for audit preparation, are examples of additional spending. The best way is to set aside a separate section for these expenses in the budget. Although you need to account for them in your spending, they need not be a part of the budget core. It is wise to include a contingency fund in the budget to handle uncertainties in the business. 

6. Scrutinize cash flow

Analyzing cash flow is the starting point for budget analysis. A clear record of expected revenue and expenses can be derived once the previous budget is analyzed and various costs have been identified. Scrutiny of cash flow is carried out based on points like – was your spending as expected; was revenue consistent across the last year or were there spot seasonal effects? Cash flow is the relationship between incoming and outgoing cash.

The cash flow helps you know that the spending is as per the budget plan, and a dip in the income can be matched with the expenses. While scrutinizing the cash flow, you need to look for specific areas that might require special attention and those aspects that impact the budget heavily. 

7. Make business decisions

Based on the analysis and preparation you have made so far, you need to chalk out the budget plan. There are several templates available for creating a budget. The most challenging business decision to make is to choose the projects or business priorities that require funding. Adopting a consultative mode throughout the process helps gather input and rely on the expertise of skilled team members to guide through the process. 

8. Maintain clear communication

The last step in the budgeting process is sharing it with team members and clarifying what is expected from them. Several team leads will likely have to handle the costs of their teams themselves. To do that effectively, they need the right tools and clarity on expectations.

All stakeholders need to know how much they are allowed to spend and what they have to spend. Team leads also need to know the correct way of reporting their spending. Communicating clear expectations from each stakeholder is an important step in the budgeting process.

End-to-end workflow automation

Build fully-customizable, no code process workflows in a jiffy., need for the budgeting process.

The process of budgeting   is much more than just numbers. Creating, implementing, and evaluating the budget is an important aspect of the financial health of the organization. Apart from tracking and estimating income and expenses for a business, the budgeting process is important for several reasons.

What is the need for the budgeting process?

• Helps set and highlight financial priorities and goals
• Evaluate the performance of the department – at the managerial level and below
• Communicate objectives and plans clearly to departmental managers
• Validate expenses of every department
• Control spending of every department
• Identify available funding and the need for additional funding 
• Align resource allocation to the business goals and objectives
• Facilitate collaboration between departments

Setting clear expectations is the main purpose of the budgeting process. Teams can work with a clear purpose with a well-planned budget. The process of budgeting cannot be perfected overnight, it requires collaboration among upper management, the finance department, and various budget and project managers across the company.

A budget can be developed via a top-down approach, where upper management begins the process by evaluating business objectives and current resources for preparing a budget plan. The responsibility is then passed down to the department managers who can set guidelines based on the overall budget allocation.

Alternatively, a bottom-up approach can be followed, where planning begins at the departmental level and goes up. Each department prepares its own budget plans and cost estimations and passes them to the upper management combining them into one big inclusive budget process. 

Improving the Budgeting Process with Automation

Workflow automation is a great way to improve the speed and efficiency of the budgeting process. A workflow automation solutio n like Cflow helps companies maintain cash flow and enable growth via automated workflows for various steps in the process of budgeting. Cflow is a workflow automation solution that simplifies workflow management . The visual drag-and-drop form builder enables no-code workflow automation for key business processes. The software issues alerts and notifications to stakeholders to ensure that budgets are reviewed and approved on time. 

The need for budgeting and the best practices have been thoroughly explained in the above sections. Businesses looking to speed up budget approvals and streamline the budgeting process are turning to workflow automation solutions. As per Allied Research, the global accounting and budgeting software market which was valued at $16.85 billion in 2021 is poised to grow at a CAGR of 11.4% to reach $47.97 billion by 2031.

A sharp increase in technological advancements in the area of accounting and budgeting software is expected to create lucrative opportunities in the market in the forecast period. Leverage technological advancements and make your budgeting process more effective and speedy by signing up for Cflow. 

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• Budgeting & Forecasting , Business Planning

Budget Process Steps: A Guide for Small Businesses

• Chris Arndt
• October 5, 2023

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Taking the correct budget process steps play a crucial role in the success and growth of small businesses. It allows entrepreneurs and business owners to gain financial stability, make informed decisions, and set and track their financial goals. And surprisingly, many small businesses still don’t have a budget.

In fact, in 2018 Clutch reported that as many as 46% of small business did not have a budget (mind you this was surveying only about 355 businesses). As the Entrepreneur’s CFO, I don’t find this shocking but it is concerning.

There’s no doubt it’s tedious, but without the budget acting as your stake in the ground, it’s hard to know if you’re on target. Better yet, it puts you at risk of overspending on growth and restricting cash flow. And we all know running out of cash spells death for most companies. That’s why budgeting and forecasting for business owners is essential.

In this article, we will explore the importance of the budget process, provide step-by-step guidance on creating a budget, highlight common budgeting mistakes to avoid, discuss useful tools for budget planning, and share real-life client case examples to illustrate the impact of effective budgeting.

The Benefits of a Budget Process

Financial stability and control:.

By creating a budget, small businesses gain better control over their finances with these six benefits:

• Ensure that income aligns with expenses
• Prevent overspending
• You know how and when to allocate resources
• Reduce unnecessary costs
• Identify areas for improvement
• Plan ahead for emergencies

Improved Decision-Making:

Here’s one of the #1 reasons I believe going through the budget process steps is important. The budget process drives discussion amongst your team. Budget discussions often uncover valuable insights that aid in decision-making. It gives you an opportunity to evaluate the financial feasibility of potential investments, new projects, or expansion plans. With a budget in place, businesses can make informed decisions that align with their financial goals, minimizing risk and maximizing profitability.

Key takeaway: You spend all day at your desk going over spreadsheets and reporting and it’s easy to forget your goals and your vision. You sit down with your team and it reminds you of what you’re trying to accomplish each and every day.

Goal setting and tracking:.

Budgets serve as a roadmap to achieve your financial objectives. By setting clear benchmarks and tracking progress, small businesses can stay focused and motivated . Regularly monitoring the budget ensures you are on track and can make necessary adjustments to achieve your desired outcomes.

7 Budget Process Steps: An easy-to-follow guide

There are three main stages of budgeting for high growth companies: Creating, reviewing and revising. Creating a budget may seem daunting, but it doesn’t have to be. By following these seven steps, you can develop a comprehensive budget tailored to your small business:

Related read: Learn more about the 3 stages of budgeting and forecasting for high growth companies

1). set realistic financial goals:.

Define your short-term and long-term financial objectives. These goals will serve as the foundation for your budget planning process. Review prior spending and determine whether it’s justified to maintain those expenses. Based on your financial goals, pinpoint where spending needs to increase.

2). Choose the Budget Type:

There are many different budget types, and going through these budget process steps will help narrow down which one is the right type for your business at its current stage of growth:

• Balanced (often the top choice of nonprofits)
• Value proposition  based
• Rolling budget: which can allow you to make operational adjustments for profitability before month-end.
• Incremental budget

3). Project revenue:

When you’re projecting revenue for your budget include all expected income:

• Sale of assets

Also consider your revenue drivers. Is your business:

• Subscription – similar
• Subscription – unique
• Project-based
• Commission-based
• Transaction-based

4). Include Fixed Costs:

Start by listing your fixed costs. These expenses remain relatively stable from month-over-month:

Cloud CFO Tip: for any fixed costs, also apply a set percentage to prepare your business for inflation .

5). List Out Variable Expenses:

Identify and categorize your variable expenses, such as marketing costs, inventory purchases, and office supplies. Be thorough in capturing all potential expenditures. Smart business owners (and their outsourced accounting team) will categorize expenses into some version of the following:

• General & Admin
• Research & Development
• Sales and Marketing
• Cost of Goods, etc. 

6). Include Bigger CapEx Spends and Cash Flow Fluctuations:

Anticipate significant expenses, such as equipment upgrades or seasonal fluctuations in cash flow like employee bonuses. Allocate funds accordingly to ensure sufficient resources are available when needed. Determine whether there are certain departments that need to be trimmed in order for your budget to land at the benchmark you’ve set.

7). Prepare for Contingencies:

Unexpected expenses can arise at any time. Set aside a portion of your budget for emergency situations to safeguard your business’s financial stability.

Bonus: Monitoring and Adjusting the Budget:

You’re already onto something if you regularly review your budget and compare budget variances against projected amounts of revenue and expenses. Make necessary adjustments to keep your budget accurate and aligned with your business’s evolving needs.

Remember, this is your stake in the ground, but it quickly becomes irrelevant if you’re not monitoring it and running rolling forecasts.

Budget Template & Example

Common Mistakes in Budget Process Steps

1). revenue plugs.

Be cautious when estimating revenue. Ideally when you are budgeting revenue, you’re not just picking a number based on last year’s revenue. It’s important to be  budgeting revenue based on a key driver . Base financial projections on realistic market conditions and historical data rather than unsupported numbers. I often recommend including three scenarios: average, awesome and anemic. Overestimating your revenue can lead to financial strain and misaligned expectations.

2). Neglecting the contingency budget

Unforeseen costs can arise at any time. It’s crucial to include a buffer in your budget to handle surprise CapEx for example.

3). Failing to check back in with your budget

Creating a budget is not a one-time task. And yet, the number of entrepreneurs I see that create a budget and then never look at it again… SMH. Regularly tracking, reviewing, and updating the budget is essential for its effectiveness. This ensures that your budget remains accurate, relevant, and aligned with your business’s evolving needs.

4). Too much detail

Think key growth drivers for how many hires to support x-amount of growth, rather than each department gets a new stapler this year (regardless of how much Office Space puts value on them!)

Manager,  Carolyn Koonce , recommends that clients “DO get detailed in their biggest drivers, which are usually income, COGS [cost of goods sold], and personnel expenses. Budget salary by person rather than a flat percentage across all positions. Think about if any positions will need to be added in throughout the year to sustain the growth you’re predicting. Then stay high-level on the less impactful things. Instead of listing out each supply need per department, include a general 10% increase and move on!”

Example: Let’s say the average salary for a salesperson is $82,500 and there are four positions available. Tally up your head counts to budget for benefits, equipment (we’re talking computers, monitors, printers, NOT staplers!), software as a service, training, and other expenses. Then multiply ($82,500 + personnel expenses) by the number of existing salespeople and any you anticipate hiring for the year ahead.

This approach avoids getting bogged down in details, while still obtaining valid results for comparison.

5). Not including relevant teams and departments

This kind of goes back to the idea of revenue plugs. Don’t forecast sales without speaking to the sales team, don’t budget professional services without checking in with your operations managers.

Tools for Budget Process

Spreadsheets

Many companies will use Microsoft Excel for budget planning. It allows for easy organization, calculation, and analysis of financial data.

Budgeting Apps and Accounting Software and Apps

There are numerous budgeting apps and software available that offer features specifically designed for small businesses. These tools automate calculations, provide visual representations of data, and offer convenient (although not always accurate) budget tracking. Many accounting software solutions, such as QuickBooks, Xero and NetSuite include budgeting features. These tools integrate budget planning with other financial management functions, streamlining your overall financial processes.

Here’s my CFO caveat though: while these budgeting (and forecasting) tools can automate certain functions of the budget process, there is no price tag on the value you can extract from drilling down into these variances as a team. It gives you direct insight into operations so you can adjust to meet your targets at year-end.

Case studies in budget planning, case study: a budget planning mistake leads to business failure.

In 2018, a small retail business expanded without comprehensive budget planning. They underestimated the costs associated with the expansion, leading to a significant financial strain. Consequently, the business had to close its doors within a year.

Key Takeaways:

• Without scenario planning (in this case the anemic version), you risk business failure.
• This case highlights the importance of thorough contingency budgeting and the potential consequences of neglecting this critical step.

Case Study: A successful budget process with an outsourced CFO

In 2022, one of our clients switched to weekly meetings with their outsourced CFO to track financial reporting, including budget variances and customer channel profitability.

• By closely monitoring their budget and making data-driven decisions, they experienced a remarkable revenue growth of 120%.
• This case exemplifies the positive impact of rolling budgets and nimble decision-making.

Tips for making the most of the budget process

• Regularly Review and Update the Budget:

Review your budget on a consistent basis, ideally monthly. This ensures that it remains accurate and aligned with your business’s financial goals and market conditions. Look for budget variance s as a precursor to adjusting your operations and adjust your budget as needed to reflect any changes in income, expenses, or business strategies.

• Involve Key Stakeholders in the Budgeting Process:

Engage relevant team members, such as department heads or managers, in your budget process steps. Their input can provide valuable insights and promote a sense of ownership and accountability for budget adherence.

• Seek Professional Advice When Needed:

Consider consulting with a financial advisor or an outsourced CFO to ensure your budget is comprehensive and aligned with your business’s long-term financial objectives. They can provide expert guidance on financial planning, risk management, and strategies for optimizing your budget.

The Bottom Line

Mastering budget planning is essential for small businesses to achieve financial stability, make informed decisions, and set and track your financial goals. By understanding the importance of budgeting, following these budget process steps, avoiding common mistakes, and learning from real-life case studies, you can create effective budgets that drive business growth. Start implementing these budgeting practices today with our outsourced CFO services.

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How To Create a Small Business Budget [+Free Template]

Published June 20, 2023

Published Jun 20, 2023

REVIEWED BY: Tim Yoder, Ph.D., CPA

WRITTEN BY: Eric Gerard Ruiz, CPA

This article is part of a larger series on Bookkeeping .

• 1. Create a Budget Process
• 2. Determine Key Assumptions in Budgeting
• 3. Create the Sales Budget
• 4. Create the Inventory and Purchases Budget
• 5. Create the COGS Budget
• 6. Create the Sales & Administrative Budget
• 7. Create the Capital Budget
• 8. Create the Cash Budget
• 9. Assemble Proforma Financial Statements

Common Problems in Budgeting

Bottom line.

Creating a business budget is an important step in planning. A small business budget starts with creating the budgeting process, the operating budgets, such as sales, inventory and purchases, cost of goods sold (COGS), and sales and administrative, and ends with the financial budgets, such as cash, capital, and proforma financial statements.

To help you get started, we’ve provided a very simplified version of a budget spreadsheet to illustrate how information from each area of your business is combined to form an annual budget. We’ll discuss how to use this spreadsheet throughout our article.

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Budgeting is an important subset of managerial accounting. Read our small business guide to managerial accounting and learn how managerial accounting concepts can be applied in a small business setup.

Step 1: Create a Budget Process

The budget process shows how the different departments of the business create a budget. Without a process, budgeting would be chaotic, and it would result in inefficiencies. In the budget process, you need to consider the following:

• Budget period: When are budgets created, reviewed, implemented, and evaluated against actual performance?
• Budgeting method: How are budgets created? Is it created from scratch (zero-based budgeting)? Is it based on actual results with adjustments (incremental budgeting)?
• Budget involvement: Who creates the budgets?
• Budget committee: Who oversees and approves the budgets?
• Budget manual: What are the guidelines for creating budgets?

Budget Period

The first thing to consider in the budget process is the budget period. How long should budgets be prepared? When will it be implemented? The budget period can be any time before the next business year begins. Hence, you can create next year’s budget three months prior to the end of the current year.

The crucial periods for budget planning are as follows:

• Budget preparation : The time at which managers and heads create a budget for their department.
• Budget review and approval : The time at which top management will review and approve all lower-level budgets.
• Budget implementation : The time at which all concerned parties will act upon planned activities stated in the budget. This phase runs until the effectiveness of the budget lasts.
• Budget accountability : The time at which top management will assess if the business is meeting its budgetary goals. This phase runs intermittently during the year, such as monthly, quarterly, or semiannually, especially during performance evaluation and review.

As a small business, you need not be particular about the phases. You can modify the phases depending on small business needs.

Budgeting Method

There are four different types of budgeting methods, but for small businesses, we picked only two, as they are the most appropriate for the setup:

• Zero-based budgeting : This is a budgeting technique that starts from scratch. It doesn’t use information from past budgets. Instead, departments and managers need to justify every dollar in the budget without referring to past performance or past budgeting practices.
• Incremental budgeting : This is a budgeting technique that uses actual figures from the past years and adjusts with a certain percentage. For example, if actual sales last year is $20,000, the incremental budgeted sales could be 10 percent more or $22,000.

Budget Involvement

Small businesses must consider what kind of involvement is needed during the budgeting process, given that budgets can be used to measure the performance of departments and managers. There are two kinds of budget involvement—for small businesses, authoritative budgeting is suitable if the small business owner is heavily involved in daily operations. Alternatively, participatory budgeting applies if the owner delegates decision-making to managers.

1. Authoritative budgeting

Also known as top-down budgeting, this budget involvement strategy only includes top management in the budgeting process, where operating personnel and lower-level employees have little to no say in the budget. It takes less time to create since there are fewer employees involved.

However, some operating personnel and lower-level employees may disagree with top management’s estimates in the budget. At the least, this strategy creates discord between top management and operating personnel due to conflicting views. But if prepared appropriately, authoritative budgeting reflects the business’ vision, mission, and goals better.

2. Participatory budgeting

This is also called bottom-up budgeting, and this budget involvement strategy includes operating personnel and lower-level employees in creating a budget. It is a budget co-created by everyone involved or affected by the budget being created.

It enhances the relationship between top management and operating personnel since everyone has a say in the budget. However, this strategy can take time since more employees are involved in the budgeting process. Also, some lower-level managers can use this opportunity to insert some budgetary slack so that they look good during performance.

Budget Committee

The budget committee is responsible for compiling all lower-level budgets and assembling them into one package called the master budget and reviewing and approving budgets from different departments. For small businesses, the composition of the budget committee can be the small business owners, chief executive officer (CEO), treasurer, budget coordinator, and chief accountant.

The role of the budget coordinator is to reach out to lower-level managers and communicate the wishes of the budget committee. If you’re a family-grown small business, family members, including the small business accountant or finance officer, can be committee members.

Budget Manual

The first order of business of the budget committee is to create a budget manual, which outlines the budgeting process. Lower-level managers and department heads will use the budget manual when creating lower-level budgets. The budget committee may also set specific budget formats and deadlines.

A budget manual standardizes the budgeting process—it ensures fairness and comparability among departments and managers. With this manual in place, you can prevent the instance of inserting unfamiliar line items in the budget or using different sources in forecasting budgeted figures.

The budget manual should include the following:

• Statements of budgetary purpose
• Budgetary activities, such as budget preparation, budget hearing and evaluation, budget approval, budget execution, and budget accountability
• Schedule of budgetary activities and deadlines
• Sample budgets
• Key assumptions used in budgeting

You can create a budget easily using QuickBooks Online. Its budgeting functions create budgets per account in the chart of accounts. Read our QuickBooks Online review for detailed information on our recommendation.

Step 2: Determine Key Assumptions in Budgeting

After performing the groundwork for budgeting, the next step is determining the key assumptions. These assumptions make it easy to prepare budgets since not all information is readily available until it happens. These assumptions are not arbitrary because they must be based on past experience and good business practices.

Examples of assumptions are:

• Sales forecast
• Selling price per unit
• Cost per unit
• Estimated discounts given to customers
• Estimated sales returns
• Desired ending inventory per month or quarter
• Number of raw materials used to produce one good unit
• Number of labor hours needed to produce one good unit
• Number of overhead hours (if any) needed to produce one good unit
• Inventory cost flow method used, such as first-in, first-out (FIFO), last-in, first-out (LIFO), or average cost
• Cash collection patterns
• Cash payments patterns
• Cash retention policies

Input your assumptions in the second tab of our downloadable spreadsheet. When done, all of the reports will automatically populate. It’s the quality of your assumptions that will determine if your budget is realistic. As you improve your budgeting process, you’ll come up with additional assumptions to include in the process.

Step 3: Create the Sales Budget

The sales budget is the first budget that should be prepared because almost all budgets will depend on the information in it. It is the responsibility of the sales department to forecast and create the sales budget of the company, and it is crucial that the department forecast sales reasonably using the appropriate forecasting method. Our article about sales forecasting discusses the method of sales forecasting and shows how CRM software can help.

Below is an example of the sales budget taken from our small business master budget template.

Sales budget

Step 4: Create the Inventory & Purchases Budget

There are two ways to call this budget: merchandising companies can call it inventory and purchases budget while manufacturing companies can call it production budget. However, the information shown in this budget remains the same. The inventory or production budget shows the number of units needed to meet the sales demand.

Inventory budget

The image above shows the sample inventory budget in our free template. One of our assumptions is that the business intends to keep 5% of next quarter’s sales forecast as current quarter’s ending inventory. In Q1, desired ending inventory is 500 units, which is 5% of 10,000 units of Q2’s sales forecast.

After determining the number of units needed, multiply them to the standard cost of inventory to get the total cost of inventory. The standard inventory cost is also the budgeted cost of inventory. Since some inventory prices fluctuate, setting standard costs makes it easy for us to budget.

When adding values in the total column, do not sum up the values in the beginning and desired ending inventory rows. Instead, the total beginning inventory in the total column should be the Q1 beginning inventory, while the total ending inventory should be the Q4 ending inventory.

Step 5: Create the COGS Budget

The next logical step after budgeting inventory and purchases is to determine the COGS. Through the COGS budget, we can estimate the level of COGS per quarter. This budget is necessary for preparing the proforma income statement.

Below is the COGS budget from our small business budget template:

COGS budget

Step 6: Create the Sales & Administrative Budget

The sales and administrative (S&A) budget presents the budgeted costs for sales expenses, office expenses, and administrative expenses. This is necessary for budgeting the salaries of employees and other fixed expenses. The image below shows the sales and administrative budget from our template:

S&A budget

Most expenses in this budget are fixed costs. That’s why the amounts are the same for every quarter. Manufacturing companies may also call this budget a “fixed overhead budget.”

Step 7: Create the Capital Budget

A capital budget shows all the planned capital expenditures during the year. In our capital budget example below, there are no figures because the sample company didn’t plan any capital decisions for 2024. However, we’ve included common capital decisions for you to fill out when you use our template. For instance, a bank loan is a capital inflow while the purchase of equipment is a capital outflow.

Capital budget

The capital budget in our downloadable spreadsheet does not auto-populate from the assumptions tab. Instead, enter your budgeted loans and purchases directly in the report.

Step 8: Create the Cash Budget

The last budget that you need to prepare is the cash budget, which shows all the cash inflows and outflows from all budgets. Almost all budgets above affect cash flow. For example, the sales budget can show all cash inflows from cash sales and subsequent cash collections from credit sales.

Cash budget

Accounts Receivable & Accounts Payable Schedule

Collections from accounts receivables (A/R) and payments of accounts payable (A/P) are integral parts of the cash budget. Creating the A/R and A/P schedules helps in computing the ending balance of A/R and A/P and the amount of cash collections and payments per quarter. Below are the supporting A/R and A/P schedules for our cash budget above:

A/R and A/P schedules

Step 9: Assemble the Proforma Financial Statements Based on Budgeted Figures

The ultimate result of the budgeting process is the proforma financial statements, which are the budgeted or projected results of planned activities. If the budget goes as planned, the actual financial statements should be near the proforma financial statements. Below are the proforma income statement and balance sheet in our small business budget template.

Proforma Income Statement

Proforma Owner’s Equity Statement

Proforma Balance Sheet

Budgeting helps businesses plan on future events and meet company goals. However, it is likely that you will experience difficulties and problems during the budgeting process. The four problems we’ll discuss are budgetary slack, goal incongruence, budget myopia, and standard setting.

Budgetary slack and goal incongruence occur when managers are not aligned with the business’s overall goals and objectives, while budget myopia happens when the business forgets to consider the impact of short-term decisions in the long run. Lastly, standard setting often poses a problem when standards are too high or ideal. Let’s discuss each of them in greater detail below.

Budgetary Slack

Sometimes, managers and heads can use budgets to preempt results to their favor. This unethical practice is called budgetary slack or budget padding. Budget slacks occur when managers underestimate revenue goals and overestimate expense goals and when the business follows the participatory budget involvement strategy.

When time for evaluation arrives, budget slacks will make the manager’s performance as exemplary. Managers tend to include budgetary slacks when top management is too strict and punitive whenever budgets aren’t met.

For example, the sales manager underestimates the sales forecast at $50,000 for the first quarter, knowing that they can achieve actual sales of $70,000. This example shows how budgetary slack can affect performance evaluation and create a false reflection of the company’s ability to generate revenue.

Goal Incongruence

Budgets are goals. When goals of management and employees don’t meet, the budget will not reflect the results that’s best for the business as a whole. Preventing goal incongruence enhances the quality of the budget. The goal of employees should be aligned with the business’s goals, and top management should provide opportunities for employees to pursue their career growth within the business.

Improper communication of business goals and ineffective leadership are the common causes of goal incongruence. As a small business owner or manager, you should show employees that you are committed to them with respect to their professional goals and that you expect them to align themselves with the business’s overall goals.

Budget Myopia

Budget myopia occurs when budgeting focuses only on short-term goals without considering how these goals will affect the company in the future. Managers become “myopic” in budgeting when they see budgets as measures for performance—they forget that the main objective of budgeting is to plan, organize, and manage the firm’s resources. As a result, budget realignments occur because there is a failure to plan future events.

Standard Setting

Another hurdle in budgeting is setting standards, which are tools for planning and controlling. If used inappropriately, they can cause problems in the budgeting process. It is important that you have to set your standards at a practical level.

Practical standards allow room for error or inefficiencies. It gives employees a chance to learn and improve their outputs without affecting performance. Unwise managers often impose ideal standards or standards that require optimum performance and perfection.

As a result, imposing ideal standards results in employee burnout, decreased productivity, and negative employee morale. Discouraged employees might also result in dysfunctional behavior that might be detrimental to the company.

Frequently Asked Questions (FAQs)

Why is budgeting important.

Budgets help in planning and managing business resources. Since plans and goals require an outflow of resources, budgets help the business determine the right amount of resources needed to achieve the goal.

Who should have an active participation in the budgeting process for small businesses?

The small business owner should have an active role in helping managers and supervisors craft their budgets. As the owner, you should guide your employees to align their goals with the business’ overall goals.

With our small business budget guide and template, you can create a small business master budget. We hope that the template will help you understand why budgeting is crucial to the planning, organizing, and controlling business operations.

About the Author

Find Eric Gerard On LinkedIn

Eric Gerard Ruiz, CPA

Eric is an accounting and bookkeeping expert for Fit Small Business. He has a CPA license in the Philippines and a BS in Accountancy graduate at Silliman University. Since joining FSB, Eric has used his expertise and authority in curating and writing content about small business accounting and bookkeeping, accounting software, financial accounting and reporting, managerial accounting, and financial management.

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10 Straightforward Steps to the Corporate Budget Planning Process 

Today, the corporate budget planning process is vital for Finance.  Through this structured approach, organizations allocate resources, forecast financial outcomes and plan for future financial performance.  Those key uses underscore why the process is so crucial to effective strategic management.   

Corporate Budget Planning 

In essence, corporate budget planning enables businesses to align their spending and investment with their goals, priorities and market conditions. 

The process typically involves 10 key but straightforward steps. 

1.  Define Objectives and Strategy 

Defining objectives and strategy for corporate budget planning involves setting clear, actionable goals that align with the organization’s broader strategic vision.  These objectives, in turn, serve as benchmarks for what the company aims to achieve financially within a specific time period.  What aims?  A few examples include increasing revenue by a certain percentage, reducing operational costs, expanding into new markets or enhancing capital investment returns. 

At the same time, effective objectives are both ambitious and realistic.  They provide a focused direction for financial planning and decision-making.  Accordingly, the objectives should be developed through a collaborative process that involves input from key stakeholders across the organization.  Such input ensures alignment with overall business goals and accounts for the company’s operational capabilities, market conditions and competitive landscape. 

The strategy for achieving these objectives is the roadmap that outlines how the organization will allocate resources to meet its financial goals.  What’s involved in that strategy?  Key elements are detailed planning on revenue generation tactics, cost management initiatives, investment in growth opportunities and risk mitigation measures. 

This strategic planning requires a deep understanding of the business environment, including customer demand, economic trends and regulatory changes.  That understanding allows for making informed decisions on spending, saving and investing.  But whatever the strategy, it should be flexible enough to allow for adjustments in response to unforeseen challenges or opportunities. 

Ultimately, the combination of well-defined objectives and a robust strategy enables a company to efficiently execute its corporate budget planning.  And that matters because it ensures financial stability and supports long-term organizational growth. 

2.  Review Past Performance 

Reviewing past performance is an essential phase in the corporate budget planning process.   

That review acts as a mirror to reflect the organization’s financial health and operational efficiency over previous periods.  Thus, this retrospective analysis involves a comprehensive examination of financial statements (e.g., income statements, balance sheets and cash flow statements) alongside operational metrics. 

The goal?  To identify patterns, trends and anomalies that can inform future budgeting decisions.  By understanding where the company has had financial success and faced challenges, leadership can make more informed predictions and decisions for the future. (We believe that Finance teams using AI and Sensible ML to identify patterns, trends and anomalies are the ones getting the farthest ahead.) 

Yet this review process goes beyond merely looking at numbers.  Instead, it requires a deep dive into the reasons behind those numbers.  If the company experienced a significant variance in actual revenues compared to budgeted revenues in a recent FP&A report , for example, knowing the why behind that variance is vital.  Was it due to changing market conditions, a new competitor entering the market or perhaps internal factors such as production issues? 

Similarly, analyzing expenditure trends helps identify areas of inefficiency or overspending.  This analysis can involve examining costs line by line to see where the budget was exceeded and why.  Through that process, companies can identify opportunities for cost savings or process improvements. 

Reviewing past performance, however, is not just about identifying what went wrong.  The process also helps organizations recognize what went right.  Why does that matter?  Well, success in certain areas – such as a particularly effective marketing campaign or a cost-saving initiative – provide valuable lessons.  Those lessons can then be replicated and built upon in future periods. 

This phase of the budget planning process also encourages a culture of accountability and continuous improvement within the organization.  Essentially, by closely examining past performance, departments and teams can: 

• Set more realistic goals 
• Better align strategies with corporate objectives 
• Adjust plans based on what has been proven to work or not work in the past 

Ultimately, in the corporate budget planning process, reviewing past performance is a critical step.  It lays the groundwork for more accurate and effective budget planning.  In fact, this step ensures the budgeting process is grounded in reality – one where strategies and objectives are informed by empirical data and historical context.  This grounding helps organizations not only set more achievable financial targets but also devise strategic initiatives more likely to drive the organization toward its long-term goals. 

3.  Revenue Forecasting 

Revenue forecasting allows a company to estimate its future sales and income over a specified period.  What so crucial about this projection?  It helps with setting financial targets, making informed decisions about expenditures and planning for growth. 

Typically, revenue forecasts are based on a combination of historical sales data, market analysis and an assessment of external factors that could influence demand.  Those factors can include economic trends, industry developments and competitive dynamics.  By analyzing these elements, companies aim to predict their financial inflow with a reasonable degree of accuracy.  And they do it while adjusting for seasonality, market shifts and other variables that might impact revenue. 

Effective revenue forecasting requires a meticulous approach – one that blends quantitative analysis with qualitative insights.  Companies often use models that incorporate past performance trends while adjusting for future market expectations and strategic initiatives, such as product launches or expansions. 

Whatever the model, the forecasting process is inherently iterative, with forecasts regularly updated to reflect new information or changes in the business environment.  This dynamic approach allows companies to remain agile.  How?  It empowers companies to make strategic adjustments to operations, marketing and budget allocations in response to evolving forecasts. 

Ultimately, accurate revenue forecasting is essential for strategic planning, resource allocation and financial management.  Businesses can use the forecasts to set realistic goals and measure progress toward achieving them. 

4.  Cost and Expense Estimation 

Cost and expense estimation is essential for creating a realistic and effective corporate budget plan.  Why, exactly?  Such estimations help businesses anticipate financial outflows and manage resources efficiently.  For any cost estimation, both fixed and variable costs matter.  Salaries, rent and utilities are examples of fixed costs – which, by nature, do not change with the level of goods or services produced.  Meanwhile, materials, shipping and commissions are example variable costs, which inherently fluctuate with business activity levels. 

The accuracy of cost and expense estimation greatly impacts the ability to maintain profitability and cash flow.  To estimate costs effectively, companies analyze historical spending trends to forecast future expenses.  This analysis is supplemented with information about planned initiatives, expansion efforts or any operational strategy changes that could affect costs.  For variable costs, companies also consider projected sales volumes, pricing strategies, supply chain dynamics and other factors that affect the cost of goods sold and operational expenses. 

In addition, effective cost and expense estimation requires a forward-looking approach that considers external factors.  Market trends, economic conditions and regulatory changes are just a few of such factors.  For instance, anticipated increases in raw material costs, changes in labor laws or fluctuations in currency exchange rates can all impact future expenses.  Such considerations enable businesses to develop more accurate and resilient budgets. 

But companies must also maintain a degree of flexibility in those budgets to accommodate unexpected costs.  This accommodation, in turn, ensures companies can respond to unforeseen challenges – without compromising financial stability. 

Overall, cost and expense estimations are not just about predicting numbers.  This step is also about understanding the financial implications of a company’s operational and strategic decisions.  By carefully analyzing both internal and external factors that influence costs, businesses can create budgets that support their goals while effectively managing risk.  This process requires the following: 

• Collaboration across departments 
• Clear communication of financial goals and constraints 
• Regular review and adjustment of estimates to reflect new information or changing conditions 

Ultimately, through diligent cost and expense estimation, companies lay the groundwork for financial health, strategic growth, and long-term success in corporate budget planning. 

5.  Capital Budgeting 

Capital budgeting in corporate budget planning is a strategic process that helps companies evaluate and prioritize investments in long-term assets and projects.  How?  Assessments look at potential expenditures on assets (e.g., new machinery, property, technology upgrades or expansion projects), which require substantial upfront investment but generate returns over several years.  Accordingly, the capital budgeting process helps determine which projects align with strategic objectives and offer the best potential for financial return. 

Capital budgeting employs various analytical techniques, such as net present value (NPV), internal rate of return (IRR) and payback period calculations.  Using these techniques, companies evaluate the profitability and risk of investment proposals.  This meticulous evaluation, in turn, helps ensure a company allocates its limited resources to the projects most likely to enhance its competitive position and shareholder value over the long term. 

Yet capital budgeting is not merely about identifying and investing in profitable ventures.  It also involves strategic planning and risk management.  Thus, capital budgeting requires a forward-looking perspective that considers how investments might impact the company’s financial health and ability to respond to future market changes.  By carefully selecting projects that contribute to strategic goals (e.g., expanding market reach, improving efficiency or innovating product offerings), companies can sustain growth and adapt to evolving industry landscapes. 

Ultimately, this process demands cross-functional collaboration.  That collaboration involves input from various departments to ensure projects are feasible, strategically aligned and have a clear implementation plan.  Through effective capital budgeting, businesses position themselves to make informed decisions that drive long-term success and resilience. 

6.  Allocate Resources 

Allocating resources in corporate budget planning requires distributing financial assets among various departments, projects and initiatives to achieve strategic goals and operational efficiency.  Through this critical step, companies decide how much funding to allocate to different areas of the business.  Based on what?  The strategic importance, the expected return on investment and the alignment with the company’s overall objectives. 

Thus, allocating resources requires a delicate balance between supporting existing operations, investing in growth opportunities and maintaining financial health.  Effective resource allocation ensures that every dollar spent contributes to the company’s long-term success.  Whether through driving revenue growth, enhancing productivity or entering new markets, those contributions all matter to the company’s bottom line. 

Effective resource allocation demands thorough analysis and strategic thinking.  To get started, companies must clearly understand its priorities and objectives.  A detailed evaluation of the potential impact and costs tied to each budget request is also important.  Throughout the process, decision-makers must consider projected revenue, cost savings, market trends, competitive dynamics and other factors.  Yet the process isn’t static.  It requires continuous monitoring and adjustment in response to performance data and changing market conditions. 

Ultimately, companies must regularly review how resources are allocated and make data-driven adjustments.  By doing so, companies can invest in the right areas to support sustainable growth and adaptability.  This approach thus not only maximizes the return on investment but also strengthens the organization’s ability to navigate uncertainty and capitalize on emerging opportunities. 

7.  Prepare Budget Drafts 

Preparing budget drafts in corporate budget planning is a crucial phase.  Preliminary financial plans are developed in this step, reflecting the company’s strategic objectives, revenue forecasts, and resource allocation decisions.  This process involves compiling detailed estimates of expected income, expenditures and investments for the upcoming period, usually the next fiscal year. 

Drafting the budget requires a collaborative effort across various departments, ensuring each contributes its insights and requirements.  This collaborative approach ensures the budget aligns with both the strategic goals of the company and the operational needs of individual departments.  In essence, the draft budget serves as a working document – one that facilitates discussions and adjustments before being finalized. 

The draft incorporates all the key components of financial planning.  What are those components?  They include sales forecasts, cost estimates, planned capital expenditures and any other financial commitments.  By including these elements, the draft budget provides a comprehensive overview of the company’s financial strategy. 

The preparation of budget drafts is iterative, allowing for refinement and adjustment as more accurate or updated information becomes available.  That iteration, however, requires a balance between ambition and realism to ensure the budget is challenging but achievable. 

In this phase, Finance teams therefore play a pivotal role.  How?  They analyze data to ensure consistency across different parts of the organization and integrate strategic priorities into the financial planning process. This stage often involves scenario planning and sensitivity analysis to assess the impact of various assumptions and potential risks on the company’s financial performance. 

Ultimately, by carefully crafting these budget drafts, companies lay the groundwork for financial discipline, strategic alignment and operational efficiency.  The draft budget is therefore a critical tool for guiding decision-making, setting expectations, and providing a baseline against which actual performance can be measured and managed throughout the fiscal year. 

8.  Review and Approve 

In this phase, the draft budget developed through collaborative efforts across departments undergoes scrutiny by senior management and, often, the board of directors.  This step ensures the proposed budget aligns with the strategic goals of the organization, remains financially sound, and sets realistic revenue and expenditure targets. 

The review process involves a thorough examination of three aspects: 

• Assumptions made during the drafting phase 
• Validation of the financial forecasts 
• Assessment of the proposed resource allocations 

Through those aspects, the process offers an opportunity for key decision-makers to challenge and refine the budget.  Doing so ensures it supports strategic initiatives, addresses operational needs and effectively manages financial risks. 

Notably, this phase may involve several rounds of review and adjustment, with feedback provided to department heads and Finance teams.  Why?  To further refine the budget until it meets the organization’s strategic and financial objectives.  After satisfying the scrutiny of the review phase, the budget moves to the approval stage.  This formal endorsement, usually by the company’s top executives and the board of directors, signifies the budget is the official financial plan for the upcoming period. 

In other words, the approval process solidifies the organization’s commitment to the budget’s targets and allocations, setting the stage for implementation.  The approval also serves as a signal to the entire organization about the priorities and financial direction for the forthcoming period.  With that signal, the approval emphasizes accountability and the importance of adhering to the budget. 

Ultimately, the approved budget becomes the benchmark against which financial performance is measured, guiding decision-making and financial management throughout the fiscal year.  This process of review and approval is crucial for ensuring the budget reflects the collective wisdom and strategic intent of the organization’s leadership.  Thus, the process effectively balances ambition with realism and aligns resources with opportunities. 

9.  Implement the Budget 

Implementing the budget in corporate budget planning marks the transition from planning to action.  In essence, the approved budget serves as a roadmap for the organization’s financial activities over the upcoming period.  This phase involves disseminating the budget details across departments, ensuring that managers and team leaders understand their financial targets and resource allocations. 

Implementation requires the following: 

• Setting up systems for monitoring expenditures and revenues 
• Establishing accountability mechanisms 
• Integrating the budget into daily operations and decision-making processes 

Effectively taking those actions during implementation ensures all parts of the organization work toward the common financial goals set out in the budget.  And everyone does it with a clear understanding of their roles in achieving the targets. 

Ultimately, implementing the budget is a continuous process that involves not just following the budget but also adapting to changes.  Successful adaptation requires ongoing communication and coordination across the organization to maintain alignment with the overall financial strategy. 

10.  Monitor and Review 

Monitoring and reviewing in corporate budget planning are an ongoing process that involves continuously tracking financial performance against the approved budget throughout the fiscal year.  Through this critical step, companies can ensure any deviations from the budget – whether in revenues, expenditures or other financial metrics – are quickly identified.  Doing so allows for timely adjustments to stay on track.  Collectively, the monitor and review process encompass the following: 

• Regular reporting on financial performance 
• Analysis of variances 
• Assessment of the budget’s effectiveness in supporting the organization’s strategic objectives  

Ultimately, the review component allows for reflection on what is driving any discrepancies between actual and budgeted figures.  Such reflection leads to insights that inform future budgeting cycles or immediate corrective actions.  Through the cyclical process of monitoring and review, companies can foster a culture of financial discipline, promotes accountability across departments.  That process thus enhances the organization’s ability to adapt to changing circumstances, thereby ensuring financial stability and strategic alignment. 

What’s Next for Corporate Budget Planning? 

Don’t forget to reflect on what you learn through every corporate budget planning cycle.   Insights gained from monitoring, reporting and adjusting the budget can feed into the next round.  In doing so, insights will help your company refine its planning approach and improve accuracy and effectiveness over time. 

Want a deep dive into budgeting, planning and forecasting?  Check out our free ebook ! 

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Why Business Budget Planning Is So Important

What is a business budget, business budget planning steps, benefits of business budget planning.

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Successful small businesses depend on the effectiveness of a business owner's planning process. One of the most critical elements of the planning process is business budget planning, which is also one of the final stages of the planning process. To begin, you have to gather company financial data, forecasts, and industry analysis to help you build your business budget.

Along with the valuable financial information and analytics, however, you also need to keep the company's general business and strategic plans in mind in order to build your budget.

A business budget is a dynamic, financial plan used to estimate a company's anticipated revenue and expenses for an upcoming time period. It is essentially a financial plan a business makes for a month, quarter, or year. It should be dynamic and flexible so it can be adjusted as business plans and the market environment change.

Business budgets should include every source of revenue, or income, anticipated by a firm along with all possible expenditures the firm might make during a specified time period.

A detailed and realistic budget is one of the most important tools for guiding your business. A budget provides essential information for operating within your means, managing unexpected challenges, and turning a profit. A proper budget will identify available capital, estimate expenditures, and anticipate revenues. Business owners must continually refer to their budget as a way of measuring forecasted budget figures against actual budgetary results in order to know where to make adjustments.

Planning should account for long-term needs as well. For example, if you anticipate a large expenditure one or two years down the road for computer upgrades or equipment maintenance, it's a good idea to start budgeting in advance.

A budget is a foundational  framework for your business finances, detailing past performance and providing a tool for forecasting the fiscal year, or another time period, with a view of assets, revenue, and expenses. Here is an overview of the budgetary process:

Budget Preparation

Budgets enable a business to accurately set goals, priorities, and spending caps, and detail where funding originates and where new strategies might bring revenue into the company coffers. The line items that command the most funding are high-priority items like the sources of revenue and the different types of expenses. These items demand precise bookkeeping and serve as performance indicators of the overall business strategy.

An effective budget should break down revenue and anticipated expenses by month, by quarter, or fiscal year. Depending on the size of your business, it should include separate budgets for each department. These departmental budgets should also be broken down by month or by quarter, and collectively, they will come together to form your  master budget .

The master budget is a comprehensive financial plan based on the strategic plan of the business firm. It is composed of two sub-budgets—the operating budget and the financial budget . Each of these includes a number of more specific budgets.

Businesses that rely heavily on seasonal sales revenue serve as a good example of why a budget is so important. If the months of June, July, August, and December typically generate 75% of your business's revenue, your budget will allow you to plan ahead. Having a strategy for distributing your revenue most effectively over the course of a full fiscal year will help maximize profits.

Budget to Evaluate Company Performance

In addition to being an important part of the planning process, budgets are necessary for evaluating the performance of your company over the course of each fiscal year. Common types of budgeting in business are:

• Static budgets : Static budgets are a type of operating budget that uses historical financial data to budget for revenue and expenses expected in the next time period. Typically used by very small businesses, these budgets require taking each line item and adding a percentage increase or decrease to it to reflect the next budget.
• Performance-based budgeting : This type of budget takes into account the inputs and outputs per unit of product or service in order to achieve maximum efficiency.
• Zero-based budgeting : A zero-based budget starts from scratch every time period and builds a new budget based on the conditions at that time. In other words, it starts from zero for each line item and uses internal and industry financial data to build the budget.
• Variance analysis : A variance-based budget is one where actual and expected values for every revenue and expense item are calculated. The results are used to try to bring the budget items back within a certain range and achieve improved efficiency

The use of one of these types of company budgets can be another tool for the financial analysis of the firm.

For example, if sales in the first quarter are lower than what you budgeted, you'll know to find expenses to cut later in the fiscal year in order to stay profitable. A more positive example might be sales of a new product that exceeds expectations. By tracking this trend and comparing it to what was budgeted, you will see that you have the additional revenue to perhaps revise the budget with plans to increase production or hire additional staff to handle the extra business.

Budget to Obtain Financing

A history of writing sound, detailed budgets and sticking to them can help show lenders or potential investors that you can develop a business plan and make it work.

Lenders and investors want to dig deeply into your finances and history. If they don't see evidence of strong budgeting practices, it might be a red flag that would turn them away.

If you're opening a new business and have little or no history, you need to make up for that lack of a track record with detailed support for your budget. This means doing research on the marketplace and showing how past trends or, perhaps a void in the industry, supports the numbers you present. This kind of attention to detail can help you gain serious consideration from lenders or investors.

Staffing for Budgeting

Even small businesses with only a few employees need to make sure they're staffed properly for writing and maintaining a budget. If, for example, you own and operate a small cafe, you might have a unique menu and a reputation for quality customer service, but that doesn't mean you're a financial professional.

If hiring a full-time person to handle your budget and other financial affairs is not realistic, consider part-time help or working with an outside consulting firm, especially early on and annually when it comes time to write a new budget for the next fiscal year. SCORE , a business mentorship organization affiliated with the U.S. Small Business Administration (SBA), is made up largely of volunteers with backgrounds in business and finance who provide guidance and advice to small businesses. This can be a valuable resource when you're just getting started or when you're confronted with a significant challenge. In addition to helping with budgeting or other problems, organizations like SCORE can put you in touch with other resources in your community.

Budgeting Software

Some of the best tools for writing a detailed budget and sticking to it are software programs, and they go beyond just Microsoft Excel or other spreadsheet programs. Some of the most useful budget software programs are:

• QuickBooks : One of the most user-friendly and inexpensive software programs that include budgeting.
• Budgyt : A user-friendly budget software program allowing for more than one profit and loss statement.
• PlanningMaestro by Centage : A cloud-based budgeting software program, including forecasting, for small and medium-sized businesses.

In addition, you already might be utilizing PayPal, Square, or other similar online services with your point-of-sale (POS) system . And like the software programs above, they offer tools for writing a budget and tracking revenue and expenses.

When looking for a budgeting software program, you usually want to look for these features:

• Departmentalized budgeting : Gives you the ability to create budgets by department, division, or profit center and merge them all into the master budget.
• Collaboration : Gives more than one person in your organization the ability to work on the budgetary planning process.
• Variance comparison : Gives you the ability to see actual vs. budgeted amounts on a line-by-line basis.

If a business does not develop a budget, it will face a host of problems. It is, effectively, flying blind if it is not aware how much revenue to expect or expenses to plan to during a given time period. Such a business will likely fail within the first two years after it opens.

The benefits of business budget planning are many. Here are some of the most important:

• Financial health : Without a business budget, it is impossible for you to know the financial health of your company. You will have no idea if you met or exceeded your goals.
• Strategic planning : A business budget allows you to develop a strategic plan since you will know the answer to issues like whether you can expand.
• Obtain debt financing : If a small business tries to obtain debt financing from a bank or other financial institution, it must produce a budget to show potential lenders.
• Attract investors : If a business wants to attract investors in the business, those investors will not put their money into the business unless they can see a budget.
• Tax preparation : A business budget assists in the preparation of income, sales, and payroll taxes.
• Decision making : In order to make decisions about any facet of the business, you have to know how much money is allocated to that item.

Corporate Finance Institute. " Types of Budgets ." Accessed March 9, 2021.

eFinance Management. " Variance Analysis ." Accessed March 9, 2021.

CompareCamp. " Best Budgeting Software - 2021 List of Top 10 Budgeting Software Tools ." Accessed March 9, 2021.

Business and Finance Experts Column. " The Benefits of Budgeting in a Business ." Accessed March 9, 2021.

Please note that the contents of this site are not being updated since October 1, 2023.

As of October 2, 2023, Acclr Business Information Services (Info entrepreneurs) will be delivered directly by CED’s Business Information Services . To find out more about CCMM’s other Acclr services, please visit this page: Acclr – Business Services | CCMM.

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Budgeting and business planning

Once your business is operational, it's essential to plan and tightly manage its financial performance. Creating a budgeting process is the most effective way to keep your business - and its finances - on track.

This guide outlines the advantages of business planning and budgeting and explains how to go about it. It suggests action points to help you manage your business' financial position more effectively and ensure your plans are practical.

Planning for business success

The benefits, what to include in your annual plan, a typical business planning cycle, budgets and business planning, benefits of a business budget, creating a budget, key steps in drawing up a budget, what your budget should cover, what your budget will need to include, use your budget to measure performance, review your budget regularly.

When you're running a business, it's easy to get bogged down in day-to-day problems and forget the bigger picture. However, successful businesses invest time to create and manage budgets, prepare and review business plans and regularly monitor finance and performance.

Structured planning can make all the difference to the growth of your business. It will enable you to concentrate resources on improving profits, reducing costs and increasing returns on investment.

In fact, even without a formal process, many businesses carry out the majority of the activities associated with business planning, such as thinking about growth areas, competitors, cashflow and profit.

Converting this into a cohesive process to manage your business' development doesn't have to be difficult or time-consuming. The most important thing is that plans are made, they are dynamic and are communicated to everyone involved. See the page in this guide on what to include in your annual plan.

The key benefit of business planning is that it allows you to create a focus for the direction of your business and provides targets that will help your business grow. It will also give you the opportunity to stand back and review your performance and the factors affecting your business. Business planning can give you:

• a greater ability to make continuous improvements and anticipate problems
• sound financial information on which to base decisions
• improved clarity and focus
• a greater confidence in your decision-making

The main aim of your annual business plan is to set out the strategy and action plan for your business. This should include a clear financial picture of where you stand - and expect to stand - over the coming year. Your annual business plan should include:

• an outline of changes that you want to make to your business
• potential changes to your market, customers and competition
• your objectives and goals for the year
• your key performance indicators
• any issues or problems
• any operational changes
• information about your management and people
• your financial performance and forecasts
• details of investment in the business

Business planning is most effective when it's an ongoing process. This allows you to act quickly where necessary, rather than simply reacting to events after they've happened.

• Review your current performance against last year/current year targets.
• Work out your opportunities and threats.
• Analyse your successes and failures during the previous year.
• Look at your key objectives for the coming year and change or re-establish your longer-term planning.
• Identify and refine the resource implications of your review and build a budget.
• Define the new financial year's profit-and-loss and balance-sheet targets.
• Conclude the plan.
• Review it regularly - for example, on a monthly basis - by monitoring performance, reviewing progress and achieving objectives.
• Go back to 1.

New small business owners may run their businesses in a relaxed way and may not see the need to budget. However, if you are planning for your business' future, you will need to fund your plans. Budgeting is the most effective way to control your cashflow, allowing you to invest in new opportunities at the appropriate time.

If your business is growing, you may not always be able to be hands-on with every part of it. You may have to split your budget up between different areas such as sales, production, marketing etc. You'll find that money starts to move in many different directions through your organisation - budgets are a vital tool in ensuring that you stay in control of expenditure.

A budget is a plan to:

• control your finances
• ensure you can continue to fund your current commitments
• enable you to make confident financial decisions and meet your objectives
• ensure you have enough money for your future projects

It outlines what you will spend your money on and how that spending will be financed. However, it is not a forecast. A forecast is a prediction of the future whereas a budget is a planned outcome of the future - defined by your plan that your business wants to achieve.

There are a number of benefits of drawing up a business budget, including being better able to:

• manage your money effectively
• allocate appropriate resources to projects
• monitor performance
• meet your objectives
• improve decision-making
• identify problems before they occur - such as the need to raise finance or cash flow difficulties
• plan for the future
• increase staff motivation

Creating, monitoring and managing a budget is key to business success. It should help you allocate resources where they are needed, so that your business remains profitable and successful. It need not be complicated. You simply need to work out what you are likely to earn and spend in the budget period.

Begin by asking these questions:

• What are the projected sales for the budget period? Be realistic - if you overestimate, it will cause you problems in the future.
• What are the direct costs of sales – i.e. costs of materials, components or subcontractors to make the product or supply the service?
• What are the fixed costs or overheads?

You should break down the fixed costs and overheads by type, e.g.:

• cost of premises, including rent, municipal taxes and service charges
• staff costs –e.g. wages, benefits, Québec Parental Insurance Plan (QPIP) premiums, contributions to the Québec Pension Plan (QPP) and to the financing of the Commission des normes du travail (CNT)
• utilities – e.g. heating, lighting, telephone
• printing, postage and stationery
• vehicle expenses
• equipment costs
• advertising and promotion
• travel and subsistence expenses
• legal and professional costs, including insurance

Your business may have different types of expenses, and you may need to divide up the budget by department. Don't forget to add in how much you need to pay yourself, and include an allowance for tax.

Your business plan should help in establishing projected sales, cost of sales, fixed costs and overheads, so it would be worthwhile preparing this first. See the page in this guide on planning for business success.

Once you've got figures for income and expenditure, you can work out how much money you're making. You can look at costs and work out ways to reduce them. You can see if you are likely to have cash flow problems, giving yourself time to do something about them.

When you've made a budget, you should stick to it as far as possible, but review and revise it as needed. Successful businesses often have a rolling budget, so that they are continually budgeting, e.g. for a year in advance.

There are a number of key steps you should follow to make sure your budgets and plans are as realistic and useful as possible.

Make time for budgeting

If you invest some time in creating a comprehensive and realistic budget, it will be easier to manage and ultimately more effective.

Use last year's figures - but only as a guide

Collect historical information on sales and costs if they are available - these could give you a good indication of likely sales and costs. But it's also essential to consider what your sales plans are, how your sales resources will be used and any changes in the competitive environment.

Create realistic budgets

Use historical information, your business plan and any changes in operations or priorities to budget for overheads and other fixed costs.

It's useful to work out the relationship between variable costs and sales and then use your sales forecast to project variable costs. For example, if your unit costs reduce by 10 per cent for each additional 20 per cent of sales, how much will your unit costs decrease if you have a 33 per cent rise in sales?

Make sure your budgets contain enough information for you to easily monitor the key drivers of your business such as sales, costs and working capital. Accounting software can help you manage your accounts.

Involve the right people

It's best to ask staff with financial responsibilities to provide you with estimates of figures for your budget - for example, sales targets, production costs or specific project control. If you balance their estimates against your own, you will achieve a more realistic budget. This involvement will also give them greater commitment to meeting the budget.

Decide how many budgets you really need. Many small businesses have one overall operating budget which sets out how much money is needed to run the business over the coming period - usually a year. As your business grows, your total operating budget is likely to be made up of several individual budgets such as your marketing or sales budgets.

Projected cash flow  -your cash budget projects your future cash position on a month-by-month basis. Budgeting in this way is vital for small businesses as it can pinpoint any difficulties you might be having. It should be reviewed at least monthly.

Costs  - typically, your business will have three kinds of costs:

• fixed costs - items such as rent, salaries and financing costs
• variable costs - including raw materials and overtime
• one-off capital costs - purchases of computer equipment or premises, for example

To forecast your costs, it can help to look at last year's records and contact your suppliers for quotes.

Revenues  - sales or revenue forecasts are typically based on a combination of your sales history and how effective you expect your future efforts to be.

Using your sales and expenditure forecasts, you can prepare projected profits for the next 12 months. This will enable you to analyse your margins and other key ratios such as your return on investment.

If you base your budget on your business plan, you will be creating a financial action plan. This can serve several useful functions, particularly if you review your budgets regularly as part of your annual planning cycle.

Your budget can serve as:

• an indicator of the costs and revenues linked to each of your activities
• a way of providing information and supporting management decisions throughout the year
• a means of monitoring and controlling your business, particularly if you analyse the differences between your actual and budgeted income

Benchmarking performance

Comparing your budget year on year can be an excellent way of benchmarking your business' performance - you can compare your projected figures, for example, with previous years to measure your performance.

You can also compare your figures for projected margins and growth with those of other companies in the same sector, or across different parts of your business.

Key performance indicators

To boost your business' performance you need to understand and monitor the key "drivers" of your business - a driver is something that has a major impact on your business. There are many factors affecting every business' performance, so it is vital to focus on a handful of these and monitor them carefully.

The three key drivers for most businesses are:

• working capital

Any trends towards cash flow problems or falling profitability will show up in these figures when measured against your budgets and forecasts. They can help you spot problems early on if they are calculated on a consistent basis.

To use your budgets effectively, you will need to review and revise them frequently. This is particularly true if your business is growing and you are planning to move into new areas.

Using up to date budgets enables you to be flexible and also lets you manage your cash flow and identify what needs to be achieved in the next budgeting period.

Two main areas to consider

Your actual income  - each month compare your actual income with your sales budget, by:

• analysing the reasons for any shortfall - for example lower sales volumes, flat markets, underperforming products
• considering the reasons for a particularly high turnover - for example whether your targets were too low
• comparing the timing of your income with your projections and checking that they fit

Analysing these variations will help you to set future budgets more accurately and also allow you to take action where needed.

Your actual expenditure  - regularly review your actual expenditure against your budget. This will help you to predict future costs with better reliability. You should:

• look at how your fixed costs differed from your budget
• check that your variable costs were in line with your budget - normally variable costs adjust in line with your sales volume
• analyse any reasons for changes in the relationship between costs and turnover
• analyse any differences in the timing of your expenditure, for example by checking suppliers' payment terms

Original document, Budgeting and business planning , © Crown copyright 2009 Source: Business Link UK (now GOV.UK/Business ) Adapted for Québec by Info entrepreneurs

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Budgetary Control: Process, Planning, and Making It Work

• Written by Keith Murphy
• 18 min read

In an uncertain economy, departmental heads and other budget owners go through the budgeting process focused on securing a sufficient share of scarce resources in order to meet their respective goals. They often come into conflict with the accounting department and their focus on enforcing an effective budgetary control process that aligns the various departments’ operating budgets with the actual results of their spend activity.

Bridging this gap between budget owners and the finance team begins with effective processes and transparent, comprehensive access to spend data in real time. With the right tools and practices, it’s possible to turn conflict into collaboration, reducing wastage and maximizing actual performance. Working together, team members in every department and business unit can meet their goals while giving accounting the oversight needed to ensure budgets are both sufficient and efficient.

What Is the Budgetary Control Process?

The finance team is responsible for regularly monitoring the different types of budgets created for a given financial period and ensuring spend activity hews to the budgeted figures as closely as possible—taking corrective action when necessary.

The budgetary control process helps accounting professionals:

• Prepare and monitor budgets.
• Prevent wastage and minimize cost overruns.
• Enhance the utility and availability of accurate financial reporting.
• Manage everyday operations while also providing financial guidance required to support long-term organizational goals.

For budget holders, the budgetary control process can be broken down into a sequence of four steps:

• Establishing actual budgetary positions. Drawing from one or more sources, budget holders examine available financial statements to determine their current budgetary credits, debits, and committed spend.
• Comparing Actual Results to Budgeted Figures. The budget holder compares their data to the figures set during the budgeting period. Deviations in income and expenditures from budgeted results are known as variances , and must be analyzed in order to identify the underlying issues and help prevent them from recurring in future periods.
• Performing Variance Calculations and Analysis. Having calculated all variances, the budget holder seeks to identify the underlying causes for the variance. Some of the most common reasons include:
• Human error, such as data entry errors, delays in entering essential information into the accounting system, or failure to collect all relevant spend data.
• Ineffective or inaccurate budget profiling (or a lack of existing historical data to create a useful budget profile).
• Increased efficiency in workflows, creating a positive variance by reducing costs and resource demand.
• Unexpected external changes beyond the budget holder’s control (e.g., legislative reform, rapid increases or decreases in consumer demand due to changing market conditions, supply chain disruptions created by natural disasters, war, etc.).
• Taking Corrective Action. Depending on the nature of the variance, the budget holder will work with the master budget committee to make changes that will bring the budget back under control. Some of the possible solutions include:
• Increasing income.
• Reducing spend.
• Lowering costs.
• Transfer money from one budget to another (i.e., virements )
• Clarify objectives and adjust planning for future spend based on likely outcomes (e.g., adjusting to accommodate for seasonal shifts in demand, or postponing the development of a new product to the next fiscal year).
• Tap into contingency funding.
• Modify, reduce, or eliminate services.

Advantages of Budgetary Control

Implementing a budgetary control process provides several important advantages to an organization, including:

• Functional budgets limit expenses and clearly define the spend and performance results for a given budget period. This reduces risk exposure and provides important financial intelligence companies can use to improve both financial planning for future periods and overall decision making.
• Budgetary control systems help establish both authority and accountability for department heads and other budget owners. In turn, these individuals are empowered to delegate responsibilities and tasks to meet their respective goals while adhering to the budget and supporting enterprise-level goals.
• Budget committees are generally staffed by seasoned executives from top management who understand not only their specific areas of expertise, but the enterprise and its goals, ambitions, and limitations.

The support of top management is crucial to securing organization-wide buy-in and compliance for budgetary control. They can provide clear and effective guidance in making corrections and adjustments to budget plans, and help create a culture of open communication and shared success through cross-functional team leadership to achieve smart, strategic spending.

• An effective and transparent budgetary control system prioritizes meeting benchmarks set by key performance indicators (KPIs) while keeping expenditures in line with budgeted figures. Examples of important KPIs include sales growth (expressed as a percentage, including acceptable deviation), percentage of inventory to be held to cover customer demand, gross profits (expressed as a percentage, including acceptable deviation), etc.

It also encourages all team members to practice mindfulness during the preparation of budgets and spend with an eye toward using sometimes scarce resources efficiently and strategically, with minimal waste.

• Properly deployed, budgetary control processes make it easier for finance teams to identify budgetary deviations and take corrective action in a swift and strategic manner.
• By providing an over-arching management and monitoring framework, budgetary control aims to improve transparency and strategic decision making while simultaneously improving communication and collaboration between different departments. Budget owners can coordinate their efforts with both top management and one another to more effectively make use of resources and cooperate, rather than compete, in supporting organizational goals.

Common Obstacles to Effective Budgetary Control

Financial professionals, working in and with budgeting committees, spend a lot of time, talent, and resources on the establishment of budgets they intend to help their organizations grow, innovate, and thrive. The primary objectives of budgetary control are compliance, performance, and ensuring a strategic and plentiful allocation of resources without creating needless costs, waste, or redundancies.

Departmental heads and other budget owners spend a lot of time, talent, and resources executing the business processes supported by budgets that were painstakingly assembled and confidently submitted during the budget period. But over the course of the financial month, quarter, year, etc., those budgets must be updated to reflect how actual events and business needs differ from the budgeted performance and spend values.

When a company doesn’t have the technology and internal controls in place to help budget owners communicate and collaborate effectively with finance, financial molehills can quickly become mountains that stifle cash flow, interrupt production, or hamper decision making.

These difficulties are particularly apparent at companies still relying on manual workflows and paper-based documents, but can occur at any organization that hasn’t taken measures to standardize, automate, and optimize their budgeting and budgetary control processes.

Some of the most common roadblocks to successful budgetary control include:

• Lack of real-time access to budget data for managers. Having to wait for data from finance in order to make time-sensitive spending decisions can create additional costs through delayed production, wasted time and materials, and damaged supplier relationships, threatening not just the bottom line but overall business continuity .
• Lack of real-time visibility into actual results for finance teams and budget committees. Waiting until a department or project team has a budget overrun to correct it is no way to stay ahead of the competition—or protect an organization’s cash flow and profitability.
• Siloed data collection, management, and analysis. Working in separate accounting systems and having to share data electronically in different formats (or worse yet, manually via paper documents that require data entry before they can be accessed and analyzed) can make it next to impossible to correct variances or find solutions to cash flow challenges in a timely and effective fashion.

Implementing Budgetary Control for Your Organization

1. invest in a comprehensive procure-to-pay (p2p) solution..

Strategically useful budgets rely on accurate and complete data. Choosing a cloud-based, comprehensive P2P software solution like Planergy gives organizations a considerable advantage in both creating budgets and performing budgetary control by:

• Centralizing all spend data, integrating the existing software environment, and standardizing information exchange to eliminate silos, enhance communication, and improve the speed and efficiency with which information is accessed, shared, and analyzed.
• Ensuring complete, clear, and transparent spend data for easy and accurate review and comparison of budgets vs. actual spend on the balance sheet.
• Providing process automation and optimization to ensure compliance with spending protocols and help keep spend within budget by eliminating rogue spend, invoice fraud, etc.
• Providing customizable review and approval workflows for variances, ensuring all spend is captured, approved, and assigned to the proper stakeholder, project, and department.

2. Establish Budget Responsibility

Designate a budget officer to lead a master budget committee made up of experienced top management (including departmental heads). This committee is responsible for defining the overall approach to budgeting, the establishment of budgets, and performing variance analysis in order to compare budgeted figures with actual results.

The budget officer in particular is responsible for acting as a liaison between the CEO and departmental heads on matters related to budgeting, and communicating budget information at all levels of the organization.

3. Define and Implement Budgetary Control Parameters

The budget committee sets goals for implementation of budgetary control, setting benchmarks and using key performance indicators to ensure engagement and compliance. Make sure your implementation strategy allows you to introduce budgetary control across the organization incrementally and with an eye toward flexibility, as you may need to both educate all team members (including top management) on the importance of budgetary control and compliance and/or overcome some measure of resistance to changes in corporate culture.

4. Define the Budgeting Period

The budgeting period is designated based on the business needs of the organization and the type of business. Firms with substantial capital expenditure budgets, for example, will likely require strategic long-term budgeting compared to those without such expenditures.

Regardless, prepare your budgets based on the shortest possible period of time that allows for maximum utility, flexibility, and accuracy in the financial forecast.

5. Define Budgetary Limits

Have the committee identify the principal budget factor , i.e. the factor that limits the capacity of the organization and could conceivably prevent it from reaching its goals for expansion, development, competitive strength, or profitability. This factor helps determine the order in which budgets should be prepared.

For example, a manufacturing firm will likely prioritize production budgets to ensure they have the power, raw materials, and labor required to produce goods for sale, and then proceed to other budgets such as the sales budget, the cash budget, etc.

6. Create Strategic, Control-Guided Budgets

Budget holders, guided by and collaborating with the master budget committee, create their budget estimates based on sales forecasting, limiting factors, etc. Once the committee approves, the budget holders can further refine their budgets, assemble a master budget based on the best available intelligence, and then submit it for approval.

7. Monitor and Manage Budgets

Approved budgets are regularly monitored by the master budget committee, both to ensure benchmarks for compliance and performance are being met and to identify any potential variances so they can be dealt with proactively rather than reactively.

For budget holders, this monitoring also provides opportunities to identify patterns that can be used to further refine future budgets (e.g., changing consumer buying habits during a pandemic), processes in need of optimization (improving efficiency and freeing cash for other uses), and cost centres that need special attention to ensure an optimal ROI and minimal waste.

Over time (and, ideally, using data management, budgeting, and analysis tools), budgets will continue to improve in both accuracy and efficiency, reducing risk, securing maximum profitability, and ensuring resources are being directed where they’re needed most to support success at the department, business unit, and enterprise levels.  

Spend Smarter and More Strategically with Effective Budgetary Control

You have to spend money to make money, but without a clear and effective budgetary control system, it’s hard to get the best possible return on your dollar.

Develop and implement effective budgetary control processes. Invest in technology that provides clean, reliable data in real time, along with automation and analysis capabilities. Ensure your team is educated about and engaged with the budgeting and budgetary control processes that support their departmental and organizational goals.

When you do, you’ll have the flexibility and strategic insights required to create, monitor, and manage all your budgets successfully—and ensure every dollar spent goes toward building a successful business.

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