 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 set number of times, e.g., quarterly, when they combine the year-to-date (YTD) results with the remaining updated budget for the year, to derive a forecast for that year’s results.
- Other organizations may use a rolling forecast model where the budget is constantly updated and combined with YTD results to project four or more quarters out into the future.
- Whichever model you use, start with your latest YTD results, which will replace the budget for the same period, then add the remaining budget for the year.
- Review the combined results, adjusting the budget as required.
- Benchmark these results against your KPIs and determine what you need to do to achieve the organization’s objectives.
- Update the future years’ budgets if applicable.
- Reviewing and updating the budget and forecast will be much easier and less time-consuming if done with the aid of budgeting and planning software.
Budgeting and Planning Software
It’s easy to become overwhelmed when you’re dealing with numerous and complex data. With the help of software applications, modern-day organizations don’t need to be held back from speedy and effective budgeting and planning cycles—but many don’t leverage the power of automation.
For most finance and accounting professionals, Excel is an indispensable tool. With expert usage and proper planning, Excel can overcome many of the problems mentioned above. At a basic level, it’s easy to use and can produce spreadsheets, reports and all kinds of calculations rapidly.
Approximately one third of companies continue to produce standalone spreadsheets for account reconciliation, supporting calculations, currency conversions and even comments. Excel is the program of choice for these activities. This may be good enough for smaller companies, but as your organization grows, Excel alone cannot keep pace with the growth.
American Health Partners eliminated days of budgeting and planning and rolled out a 12-month rolling forecast, positioning their operations team for success. See how they did.
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