Creating a successful budget for a business can feel a bit daunting, but here is a five-step process that has historically shown to improve accounting accuracy and reduce surprises.
Start with Last Year’s Expenses
Though this might seem like an obvious first step, it’s not as straight-forward as it sounds.
Copying and pasting last year’s expenses by account is only the beginning. Next, adjust all variable expenses based on demand changes for sales or production. Then focus on expense lines that were an anomaly to this year’s spending. For example, a staff position that was open for three months during the re-hiring process. Adjust and smooth accordingly based on reasonable expectations for the next year’s spending.
As a best practice, as these occur throughout the year, make notes to make it easier to remember what adjustments need to be made.
Adjust Next Year’s Budget Based on Operational Changes
Did a product line change? Was a location of operation added or discontinued? Are adjustments to selling prices necessary?
Adjust revenues or expenses by location and ensure all calculated figures are rolling up correctly. Make sure revenues and variable costs are proportionately adjusting based on changes in input costs, productivity, and demand.
Examine Expenses by Vendors
Focus your efforts on the vendors you spend the majority of your expenses on.
Establish a total dollar spend, or percent-of-sales threshold in order to know which vendors to focus your time on. Then evaluate each budget line that applies to vendors and make sure the total budgeted amount makes sense in comparison to expected volume or sales.
Make sure to review any discounts or purchasing terms to properly account for price breaks you may or may not receive in the next year.
Compare Percent to Sales
As part of the final scrub through, compare all sales and expense lines as a percent of total sales or revenues. Compare the results for all lines to the previous year’s percent-to-sales to make sure they are comparable with each other.
If there are significant changes either adjust as needed, or make sure these variances can be explained.
Gain Alignment
Once you are comfortable with the results, schedule reviews with key stakeholders to make sure there is alignment from managers up and down the organization. This will provide everyone needed visibility to the goals and strategies of the organization, and provide an opportunity to propose changes.
The goal here really is to make sure there are no surprises.
Creating your successful budget
Creating a successful budget for a business can be a challenging process. This article outlines five straightforward steps to help any business create an accurate budget and reduce any surprises.
This process starts with looking at last year’s expenses and making adjustments accordingly. This should be followed by operational changes that need to be taken into account. Next, expenses by vendors should be examined and compared to sales. Finally, the budget should be reviewed with key stakeholders to ensure alignment and that no surprises arise.
