Preparing a budget is “easy” for an accountant and small business people who have some finance training. However for many it is the stuff of voodoo.
But when you break it down, there is no real mystery around the preparation of a budget, it is based on your plans and intentions, costs that you can obtain from suppliers, and some judicious making of assumptions and estimates. In truth, any non-finance executive or business owner can do it if they approach the task logically.
Here are 5 basic steps to take to compile your budget.
1. Tell the story of your plan first.
A budget is no more than the costing of a story. Is your story one of expansion, or of reduction? Does your story include the need for more staff or capital equipment? Is your story about opening more stores?
So the first step is to provide a narrative of your operational plans for the period of the budget, usually a year. If you don’t have a business plan, look at your business and ask yourself what you will do within it for the year ahead. List any new initiatives, identify any areas you either want to close or reduce in size, identify your goals.
If you have a business plan (and why don’t you? But that’s another story!) then the narrative should already exist – you just need to follow the next steps to quantify the costs and expected revenue.
2. Break your business into logically different areas and apply the story or business plan to each.
Every business can be broken into its component parts, and often it is better to deal with each part separately so that you don’t get confused how some costs may be affected by the different areas. For example your business can be broken into departments or products or branches – each of these will have their component of costs when you apply your business plan or story that will apply to each in a different way. Take the cost of staffing. If your story is to expand product 1 or Branch A but not the others, then Product 1 or Branch A may need to account for an increase in wages of 20% whereas the other products or branches may see no increase. It’s better to deal with each component so that your thinking is clear about each, before you put the whole together.
Once you have decided on the logical components, you would apply the next steps on each separately.
3. Build the plan by working out what you need to do to implement the plan
In this step you start to identify the key areas you will need to spend money in, and the effects on incomes the plans may bring.
In following your plan, what will you spend money on? For example if your plan is to increase sales by 25%, what do you need to spend money on? You may need to increase production costs pro-rata to the increase in sales. You may need to increase Advertising. The increase may mean an increase in delivery costs such as Fuel or Courier charges. Your plan may include opening extra hours – then you will need to consider an increase in labour costs, heat and light, and so on. Perhaps you plan to offer new services – what will the new staffing costs be for this service? Will it include the purchase of new equipment, computers, desks? Will this then increase the usage and therefore cost of stationery and printing?
As you can see, each action item in your plan can be logically examined to see what cost and income effect it will have.
4. Get some quotes, collect the information, make some estimates
This is where the budget exercise blends information with educated guessing – after all we can’t really predict the future but we should be able to make a logical guess based on past facts.
From step 3 you will have identified the changes to costs and income. You may have then been able to identify the quantum of the change. However if you have not you do it now.
Each identified change will have some method where you can find out or guess at the cost.
For example, if you have identified that you will need to buy more desks and computers, you can call office suppliers to get quotes for how much a desk might cost and multiply by the number you need, or you can obtain quotes on computers. The increase in stationery should bear some relationship to the increased staff and work – you can say “assuming that our 10 staff now use $2,000 worth of stationery a month, then hiring 2 more should increase that cost by $400 per month.
You should be able to look at each expense and income item in your accounts and make these logical assumptions.
5. Bring it all together
This is the final step where you gather all the above into a budget – usually using spreadsheet software that can automatically calculate the totals.
List all the accounts, then in columns, enter the information you have gathered per product, department or branch.
The resulting budget should represent a good estimate of the costings of your plans.
Finally, remember at the end of the day – a budget is just a forecast. You can get it wrong. So the important thing is to check it against actual regularly, analyse why there are differences, and if necessary (because you got the price of something wrong or an estimate is too far off), make changes for future periods.