Every great financial plan starts with a sound budget. Whatever plan you have, a budget is your first step toward making your financial goal a reality. Well, it’s one thing to sit down and decide what you need to budget and another to execute it but most people realise that, even though they don’t successfully manage to budget. Therefore, spending less than you earn is the main idea behind a budget.
A good budget must take into account a few basic elements, of which without considering these elements your budget might be incomplete. It should consider:
INCOME -Most basic element of all budgets is income. You should keep track of how much you make and from which sources.
FIXED EXPENSES-This are expenses over which you have little control or are unchangeable.
FLEXIBLE EXPENSES-This one refers to things that you want to spend money on but don’t necessarily need.
UNPLANNED EXPENSES AND SAVINGS-These two critical pieces should be included and should be in two separate accounts.Savings shouldn’t be dipped into if you can help it,even for emergencies.
Budgeting is a detailed process with several intricate steps leading up to understanding it at large.The following is a step by step guide to the budgeting process for your business.
1. UPDATE BUDGET ASSUMPTIONS
Budgets are always prepared on certain assumptions. Those assumptions could be related to the sales trends, cost trends or environmental conditions. Before embarking on preparing the budget, these assumptions must be thoroughly reviewed according to the recent environmental conditions.
Limited funding can greatly hinder the growth projects of the business. Therefore, in the preparation of budgets adequate attention has to be given to the available funding as the availability of investable funds will determine the initiation of viable projects.
3. STEP COSTING POINTS
The business environment is subject to dynamism. Every day it is posed with challenges that can completely change its cost structure. Therefore, in the budgeting process certain factors that can affect the costing for the business should be closely considered. These factors should be identified beforehand in order to make the budget realistic.
4. CREATE BUDGET PACKAGE
In budget package, previous standards related to the budgeting process are taken in order to formulate a budget for the current period. Previous standards are updated according to the recent environmental conditions. Budget package is a kind of outline according to which budget has to be prepared.
5. OBTAIN REVENUE FORECAST
There is no denying the fact that sales budget is the most crucial budget of all. All the budgets are based on the sales budget. Furthermore, sales budget determines whether the business is generating enough revenue necessary for its survival. Therefore, adequate attention must be given to the preparation of sales budget by forecasting demand accurately.
6. OBTAIN DEPARTMENT BUDGETS
The department budgets will help to reach a budgeted expenditure for the budgeted period. Each department will prepare its own budget and then all of them will be combined to become a part of the master budget.
7. VALIDATE COMPENSATION
Compensation plans are a significant component of the budgeting process. As compensation is subject to an annual increase, therefore, it should be prepared with great care. The approval for compensation increase should first be taken from the top management, and then it should be augmented in the budgeted compensation plans.
8. VALIDATE BONUS PLANS
In order to maintain the morale of the employees, bonuses are frequently given to out motivated workers. Bonuses act as an appraisal method. Bonus announcements that are not considered in the budgeting process can create havoc in the profits of the business. Therefore, any bonus plans should be taken into consideration beforehand. The top management should be consulted for any bonus plans.
9. OBTAIN CAPITAL BUDGET REQUESTS
Capital expenditure ensures expansion of the business. It helps the business to avail the opportunities necessary for business growth. Any capital expenditure plans should be taken in advance, and they should be included in the budgeting process accordingly.
10. UPDATE THE BUDGET MODEL
Any changes in the assumptions of the budget model should be updated, and final budget should be prepared accordingly. A delay in this may lead to glitches later on that could cause confusion.
11. REVIEW THE BUDGET
The budget should be reviewed thoroughly once it is prepared in order to correct any flaws. A little decimal placed wrongly can create quite an unbalance in the budget sheet.
12. OBTAIN APPROVAL
The budget should be presented to the top management. They will evaluate whether it has been prepared according to their requirements and finally l approve it if it does not need any changes.
13. ISSUE THE BUDGET
The budget should be formally issued after its approval. All the operations there and then will take place according to it.