rdingly.
- 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.
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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 necessary to set aside time and resources to create the budget. Normally produced once for the next fiscal year, it may be updated on an ongoing basis as required. As the business grows, some companies also produce multi-year budgets.
When creating a budget, always involve the appropriate staff and follow these key steps:
- Review and understand all the components of a budget (see the list above on what you should include)
- Pull up historical data, where available, for each of the revenue and expense components
- Include staff who are responsible for generating sales or selling, those who are in charge of spending and those in charge of tracking inflows and outflows
- You may use the previous year’s budget, if available, as a guide, but not to replicate
- Estimate the revenues for each fiscal month and year
- Estimate the expenses for each fiscal month and year
- Determine what, if any, capital expenditures are required for the budget year and the next few years
- Review the budget and start to look at the bigger picture like investing and divesting activities, e.g., major acquisitions and dispositions, and financing activities including adding or reducing debt and equity
- Prepare financial statements—balance sheet, income statement and cash flows—using the budgeted data
- Produce KPIs and other ratios to see how the budgeted results stack up against previous years and against anticipated changes in market conditions
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How to Review, Maintain and Update a Budget
A budget is useful only if it is reviewed, maintained and updated. Remember:
- As the year progresses, monitor the business against the budget using reports and analytics.
- Based on these reviews, proactively make changes to your business plans and tactics to ensure that you meet your budgeted outcomes.
- Some organizations prefer to have a s