Guide to Creating Your Company Budget

For many companies with a December 31st year end, September is the time to plan a budget for next year. Creating a budget helps set company goals for the upcoming year and marks a clear path of where a company wants to go in the new year and how they intend to get there. Gathering feedback from our expertly trained consultants, we have developed a “Guide to Creating a Budget”. The guide outlines the best procedure to follow for creating a versatile budget, and has hints and tips for companies of all sizes.

Examine the Past Year  The first step in developing a budget is to look at company performance for the current year. Analyzing the company’s current environment will provide information and insight which is helpful in predicting what the next year will be like. Specifically, by looking at the leading indicators and major drivers of business for the current year, it is possible to identify the key variables the business depends on. It is also useful to examine external factors as well. For example, if the business’ profitability is largely dependent on labor costs, examining current and expected trends in labor costs is a necessary preparatory step to creating a budget.

Set Company Goals  Setting company goals for the upcoming fiscal year is the next step in developing a budget. The goals for the year should essentially function as a high level business plan, detailing certain benchmarks the company wants to achieve. In setting company goals, it is also important to look at relationship between business factors. For example, if a company goal is to increase profits and decrease expenses, what impact does this goal have on workforce, on product lines, on other costs, etc?

Develop an Overall Budgeting Process  After looking at trends throughout the past year and setting company goals, the next step in creating a budget is to develop a budgeting process. Fashioning a budgeting process and budgeting model to be used throughout the organization is in itself a 4-step process.

1. Develop a Budget Process Outline  To begin developing a budget process, first create an outline. Deciding on what budgeting platform to use and what the submittal and review process should be are two keys to developing an overall budgeting processes. It is also helpful to look at what level budget needs to be monitored. For example, monitoring the budget at the lowest account level will require an entirely different process than monitoring the budget at the financial statement level.

2. Identify Budget Guidelines  The next step in developing a budgeting process requires identifying budgeting guidelines. In identifying budgeting guidelines, it is necessary to put together an overall plan that achieves a specific percentage of revenue growth. Guidelines should include the directive of a revenue percentage growth as well as the business plan to support to attainment of the budget. Overall, the guidelines will function as the action plans, allowing an organization to adhere to their budget while achieving business goals. A budget in itself merely describes numbers, while the budgeting guidelines function as the plan of action. For example, if next year’s budget reduces employee compensation by 5%, a potential guideline could be to institute a hiring freeze. Other guidelines may relate to salary change, expected changes in foreign currency expectations, fluctuation in labor costs, and outsourcing costs.

3. Identifying Key Budgeting Participants  The next step in developing a budgeting process is to identify the key budgeting participants, and delineating the key participants largely depends on the budgeting guidelines. The structure of the budget, whether created chiefly at the executive level, at the department level, or by every employee of the company, will determine what individuals need to be involved in the process. Finding the key participants also depends on the structure of a company, the number of executives, the number of department heads, and the number of departments.

A related step in identifying key budgeting participants is education. Individuals that are involved in the budgeting process need to understand their role, understand the goal of the process, and be familiar with certain budgeting terminology. Key participants need to be identified so they can participate in the process, yet getting these individuals to contribute to the best of their ability is easiest when everyone understands certain basic information. If the budget process involves participants from all departments, it is likely that some participants will not have prior knowledge about finance and budgeting. Educating these individuals on budgeting procedure, as well as their role, will make the budgeting process go as smooth as possible.

4. Determine a Timeframe The final step in developing a budget process is to set a timeframe. Ideally, the budget for the next fiscal year should be approved and take effect on January 1st. It is helpful to work backward from this day to determine the key deliverables and deadlines that need to be put in place. A GANTT chart or some schedule can be helpful, as that will outline not only who is responsible for what, but also when certain deliverables are due.

Overall, developing a budget can be a kick off to a successful new year. The budgeting process itself details the cost relationship to results and the impact this can have on an organization. In addition to constructing a solid budget, there are also other steps companies can take to make the next year as financially secure as possible. Beginning the year with good reporting tools, properly aligning the accounting system against the budget, and implementing corrective actions based on budget performance are all keys to having a successful year.

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