geting is determining what and how much of a specific resource—financial, human and/or time—you need to get there.
Assuming the organization has identified some overarching goals, planning involves developing objectives, setting timelines, adopting key performance indicators (KPIs) and assigning accountability to the appropriate people and departments. Planning tends to be for the long term, reaching three years or more.
Budgeting, on the other hand, aligns business activities with business objectives. Employees are tasked with figuring out how much needs to be spent on operating the business, and where the revenues and cash flows will come from to cover expenses, while still being able to invest back into the business so it can continue to grow. Through this budgeting process, you allocate the resources necessary to execute your plan, which usually covers the upcoming year and three to five years thereafter.
What are the Benefits of Planning and Budgeting?
When organizations don’t plan and budget, it’s like traveling without a roadmap or GPS as you blunder along to find your directions. Likewise, planning and budgeting help to chart the way to a profitable business—with a myriad of other benefits along the way.
Benefits of Planning
Effective planning allows you to:
- Proactively respond to anticipated roadblocks/bumps instead of reacting to them.
- Set clear objectives for your organization and communicate those objectives to the employees.
- Have clear accountability and ownership throughout the course of the plan.
- Have a baseline of KPIs against which you can measure the organization’s performance.
Benefits of Budgeting
Effective budgeting allows you to:
- Anticipate your cash flows and know when and where you’ll need them, instead of wondering if you have enough to meet all your business needs.
- Create an environment for employee buy-in, because they should be involved from the bottom up.
- Gauge the health of your business by comparing actual results to the budget, allowing you to adjust your tactics accordingly.
- Delegate and clarify authority for each component of the budget, allowing the organization to respond quickly to any situation.
How to Create a Budget Plan
Creating a budget doesn’t need to be a difficult exercise if it’s part of the organization’s annual cycle. It’s common practice to prepare a budget for the upcoming fiscal year and to update it as the year progresses. These ongoing revisions produce fixed and/or rolling forecasts depending on the company’s needs.
Want to learn how to build a better budget in five minutes? Check out our infographic 5 Budgeting Best Practices You Need To Start Using Today, and take the first steps to reducing costs and driving growth.
What to Include in a Budget
What you include in a budget will vary somewhat, depending on the type of business you’re engaged in. Without being industry specific, typically, a budget should include the following:
- Revenues—detailing the types of revenues, how much and when to expect them
- Fixed costs such as:
- Salaries—these can be fixed or variable. Base salaries are fixed, while other payroll costs could be variable due to staffing fluctuations for supporting production needs
- Rent paid to landlords or imputed rent if you own the property
- Utilities for lighting, heating, cooling, telephone, internet
- Property taxes and other fixed business taxes
- Property insurance
- Interest on debt
- Amortization of capital expenditures from previous years and budgeted year(s), if required by accounting standards
- Variable costs such as:
- Delivery, both inbound and outbound
- Office administration cost like supplies, postage/courier
- Travel and vehicles
- Fees for software licensing, legal and other professional services
- Advertising and promotion
- Maintenance and repairs
- Meals and entertainment
- Capital expenditures such as one-time purchases of physical assets for long-term use, or investment in non-physical assets
Key Steps to Create a Budget
The budget process should be included in an organization’s annual business cycle, and it’s