Ten (10) essential steps in Business Budgeting

When thinking over objectives, take SMART goals as a guiding principle, which means, that goals should be specific (S), measurable (M), achievable (A), relevant (R), and time-based (T).

• Specific goals (S) mean clear and well-defined, detailed, focused and simple.
• Measurable goals (M) mean, that you must have some criteria or metrics to measure progress in the goal achievement. You can use key performance indicators, KPI metrics .
• Achievable goals (A). When we speak about such kind of objectives it means, that very crucial to set attainable and realistic goals that can be realistically achieved, so, do not underestimate or overestimate company's potential.
• Relevant goals (R) mean, that they have to be consistent with company's mission, vision and strategy.
• Time-based goals (T) signify realistic timing. Objectives should have clearly defined timeline, with the starting date and deadline.

First of all, gather all company's current financial statements and also carefully review the most recent budgets to get the historical data on sales and costs. Financial statements and the budgets of the previous years are useful sources of the information needed to create a budget.

Information you will need is to know the actual and forecast sales data, planned production volume, future demand for raw materials, planned staff number etc. The more data you can get for budget preparing the better.

List your expectations and the ways of handling issues. Are your expectations realistic? Define the difference between wants and real needs for your business. Try to focus on those things actually needed for the business development.

Reconciliation means comparison of the different data sets, identifying and investigating differences, as well as taking corrective action if necessary.

After all goals are set and data are collected, do not forget to review and reconcile them. Some objectives are independent and do not affect each other, but sometimes the goals can directly conflict with each other within the organization. This can lead to ineffectiveness of the budget process organization. That is why it is crucial to reconcile and de-conflict objectives before budget preparing.

As for the data reconciliation, this process helps to avoid random errors. All possible discrepancies in data must be detected and corrected. In order the budget to be succeed, goals and data have to be reconciled.

There exist a wide variety of desktop and cloud-based planning and budgeting software and apps, budget templates and other planning tools that can help you to prepare and track your business budget. Microsoft Excel is still very often used to organize planning processes. Some companies are used specialized planning programs in combination with Excel for their budgeting and planning calculations. You can choose whatever method you want and which the best suits for your business needs.

Once you have set down your financial goals and collected all the data, the next step is to create a budget to ensure meeting these goals. The good budget is one of the keys to growth, profitability and success for every business.

So, budget creation in few steps:

1. Define time period of your budget. Do not forget to indicate the fiscal year that the budget covers, and mention whether this budget is the first one or you update the previous one.


2. Start from calculation of your future monthly income, describe income sources. It helps you to determine the total revenue and so understand how much money you can spend on expenses. The business income may consist of the following: sales (try to estimate monthly sales), investments, lease, advertisements etc.


3. List your monthly business expenses. You have to research all costs in order to be not caught off guard by unexpected expenses. Distinguish between the expenses that occur every month, bimonthly or quarterly. This separation is known as fixed and variable expenses.


4. Estimate your monthly fixed and variable expenses.

   Fixed costs (in Finnish, kiinteät kustannukset) are costs that do not change if the quantity of output changes. It can be: office rent, business phones, taxes, utilities, insurances, professional fees (for example, accounting fees) etc. Variable costs (in Finnish, muuttuvat kustannukset) change in relation to variations in the business activity. It can be: raw materials, production costs, shipping costs etc.

5. Calculate gross profit margin. Gross profit margin is a measure of a company's profitability, it shows the financial health of the business. To calculate Gross Profit just subtract the Cost of Goods Sold (COGS) from Total Revenue.

   Gross Profit = Total Revenue – Cost of Goods Sold

   (Remember that Cost of goods sold (COGS) refers to the direct costs of producing the goods. Gross profit as a rule does not include fixed costs, but although direct costs are typically variable costs, they can also include the fixed one)

   Gross Profit Margin = Gross Profit / Total Revenue

6. Create a 12-month Cash flow forecast and Profit and Loss Statement.

   Combine your total costs (fixed and variable) with total revenue from all sales for each month to know how much money is supposed to be coming into your business during the year and how it is going to be generated. This helps to eliminate almost all unexpected situations that could occur over a 12-month period and create a business budget that will be based on expected projections. Cash flow statement and P&L statement allow you to keep your spending under control.

7. Plan to make regular budget reviews.

   Review and make the necessary adjustments to the budget as often as possible to keep track of business progress and to determine what went wrong and what kind of mistakes were made.

Now when you have set goals, identified future income amount and income sources, business expenses as well as calculated gross profit margin, it’s time to put your plan into action! Start to work according to approved plan.

Do not forget to monitor the budget progress by comparing plans with what actually has been done during its implementation. Do not panic about minor variances in the budget. It is quite normal situation if you will have some variances or deviations from the expected outcomes.

The small differences between actual and predicted budget figures are normal, expected and just a part of doing business. Nevertheless, it is important to understand these differences, where they come from, and what they mean to your business results. As soon as you identified the problem, it is necessary to take appropriate actions to correct it and mitigate its effects.

Budget should be reviewed and updated if necessary, at least once a year. It is good to re-evaluate the budget halfway through the year. This way you can assess the actual results and adjust the budget to more accurately according to business needs.

It is worth to re-evaluate your budget if, for example:

• there are significant variances between plans and actual outcomes;
• your budget has small variances, but you expect these differences to continue;
• business needs to spend money for large unbudgeted expenses;
• business has a problem with monthly payments, lack of money;
• business income or expenses considerably changed.