In this article, we’ll guide you step-by-step through the budgeting process, making it an effective support tool for managing your business.
– A guide for beginners or those looking to streamline their budgeting process.
Laying the Foundation for Your Budget
1. Identify Key Aggregates
Start by selecting the primary categories on which to base your budget. These might include types of services, product groups, operational regions, or organizational departments. It’s important that these aggregates are tailored to your business’s unique nature and account for both revenue sources and cost origins. This segmentation allows you to divide the company into manageable components, making it easier to control finances and manage the budget effectively.
2. Assign Responsibility
For each aggregate identified, assign a person responsible for it. By delegating responsibility to specialists from various areas, you not only expedite the process but also benefit from their knowledge of forecasts and data in specific segments. This approach ensures that the budget relies on realistic assumptions and more accurate forecasts. You also gain greater team engagement in budget execution and planned activities, as team members feel a stronger connection to set objectives.
3. Build a Strong Relationship with Your Accountant
Request the latest financial data, ideally broken down into the previously identified aggregates. If your company has not yet divided expenses into cost centers, consider reconstructing this breakdown. These data will serve as the starting point for budgeting and help analyze which areas generate revenue and which incur costs.
4. Analyze Historical Data
Review historical data, isolating one-time financial events that could distort the analysis. This helps focus on actual trends rather than exceptional events that might cloud the financial picture and lead to inaccurate forecasts.
5. Identify Macroeconomic Factors
Examine economic indicators that might impact your business: inflation, raw material price increases, interest rates, and exchange rates. Identify those with significant relevance and incorporate them into the budget. For example, if rising energy prices are likely to impact operating costs, consider a less optimistic scenario to avoid surprises from sudden expense increases.
6. Identify Industry Trends
Analyze expert forecasts for your industry and assess the extent to which trends may affect your organization. This analysis allows you to anticipate market changes in the budget. Involving key people from your organization in these analyses can lead to valuable discussions, helping identify both risks and opportunities for your company.
7. Verify Changes in Legal Regulations
Review changes in tax or legal regulations that may affect tax burdens and business operations. If necessary, seek expert advice to estimate the impact of these changes on your business and include them in the budget.
Define Goals and Resources
8. Plan Revenue Growth
Set realistic revenue targets for each area of activity, considering both internal resources and external factors. This approach helps you focus on achieving these goals while minimizing risks.
9. Plan Costs in Line with Revenue Goals
Prepare a cost budget that includes the resources needed to meet revenue targets. For instance, if you plan to increase sales, you may need to hire additional staff or rent a larger office space. Factor in inventory and accruals to get a realistic picture of financial resources and needs.
10. Analyze Investment Needs
Include planned investments, such as purchasing computer equipment, new software, or production lines. Estimate related expenses so the budget accurately reflects the organization’s financial needs and provides sufficient funds for growth.
11. Check Financial Liquidity
Assess whether available funds are sufficient to cover investment costs and maintain financial liquidity. If additional financing is needed, consider options like factoring, a revolving credit line, or leasing, and estimate the associated costs.
Create Monitoring and Management Tools
12. Monitor Indicators and Analyze Assumptions
Develop indicators that will help you monitor budget progress. Examples include the ratio of salary costs to revenue. Check whether the indicators align with assumptions and trends in your company or industry, and in case of deviations, analyze the causes and make adjustments as needed.
13. Document Assumptions
Record all data and assumptions on which your budget is based. This helps maintain transparency and facilitates future analysis by allowing you to trace the causes of any deviations. Discuss these documented assumptions and their completeness with key individuals responsible for the budget and its execution.
14. Get Comfortable with Excel
Create a budgeting tool in Excel that allows you to collect and analyze data in a clear and systematic way. Excel is often sufficient for beginners and provides full monitoring of the budget, subsequent variance analysis, and enables scenario analysis.
Monitor and Optimize Budget Execution
15. Discuss the Budget with Your Team
Review the finalized budget with individuals responsible for specific activities, communicating the business goals the company aims to achieve. Involving the team in planning increases their motivation to meet the set goals and achieve the expected results.
16. Repeat the Process
Repeat the process until you achieve a complete budget – only when the responsible individuals agree that the budget is ready can you consider the process finalized. However, remember to review the budget periodically and make adjustments as new significant data becomes available.
17. Implement Budget Execution Monitoring
Assign individuals to regularly monitor deviations from the budget. This enables quicker responses to changes and supports timely decisions for adjusting the strategy.
18. Regularly Analyze Deviations and Report
Establish a variance reporting system and review deviations with those responsible for individual budgets. Draw conclusions and make data-driven decisions. This process ensures effective management of operations.
Budgeting for Strategy and Growth
Budgeting is more than just cost and revenue control. It serves as the foundation for building a long-term strategy that enables a company’s growth and survival in a dynamic economic environment. This process aids in informed management, monitoring economic conditions, and quickly responding to risks and opportunities.
If you feel that you need support in budgeting, or you lack the time, knowledge, or experience, consider seeking expert assistance. A part-time CFO or financial controller can guide you through each step – from analyzing historical and market data to monitoring budget performance.
