Budgeting 101: Where to Start From
Your budget is the single most important plan that can make or break your business. Understand how to create a budget you can stick to using two methods
We’re three weeks into 2018. The breaking point for most new year’s resolutions is now. . . which you can tell by the crowds getting thinner at the gym. Modern businesses with new plans, strategies, and budgets for the year are also at a delicate point. If you stay on track this month, there’s a good chance you’ll reach your goals before the year ends.
One of the most important plans of the year is your budget. Budget season was months ago, and most companies spend a good many months planning and preparing it. Constructing the ideal budget for your business is like perfecting a science – not just because it involves numbers, but because it requires data, predictive models, and instinct.
Companies that will be doing budgeting on their own this year, or just want to understand how the process works need to know that are two ways to create a budget. One is based on actuals and forecasts, while the other is zero-based budgeting. We’ll give you a brief overview of what each is, and what kind of businesses they apply to.
Scientifically based budgeting – Data and a whole lot of math
This scientific approach requires data. It is suitable for companies who have been operating for more than a year. The longer they’ve been in business, the better. Based on previous sales and expenses, a CPA will create forecasts and calculate estimates.
The basic crux of budgeting this way is using the current year’s actuals and forecasts to calculate an estimate for the next year – or even the next couple of years. Some CPA’s do it by function and add them all together.
After analyzing the data, the CPA gets a number for the amount of sales that you will need in the year to cover expenses and other functions. This is also where ‘give-and-take’ happens in budgeting. Executives, together with their accountants, figure out how to bring cost-efficiency in their business by lowering expenses, aiming for a large profit margin. It can actually take many months to figure it all out.
A base budget tells a company what it can achieve with expected sales, and direct the company towards supporting those sales. Sophisticated ‘what if’ scenarios are also built here. They include backup budget plans, if sales fall short of expectations by a certain percentage, or if costs go up despite meeting the sales forecast.
Companies with new business lines go with zero-based budgeting. This approach has no actuals and estimations to build off because of no previous sales records. Accountants instead use other sources of information to estimate the quantity of units expected to be sold, and the corresponding costs of manufacturing and supporting functions to build a budget. While less scientific than its counterpart, zero-based budgeting provides a useful guide to standards that the business has to maintain to keep profitable and afloat.