briefly explain on budgets and business planning process

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How to Master the Fine Art of Business Planning and Budgeting

Updated on: 5 January 2023

Starting a business is a challenging thing: you have to work hard and do your best to ensure its success. However, the work doesn’t end even when your business actually becomes operational. You still have to do so much more to ensure that it will keep on track.

Of course, it could be hard, especially for the beginners. It seems that you have to keep an eye on so many things and focus on so many urgent tasks every day that there isn’t any time left for business planning and budgeting. However, it is very important to find that time, because business planning and budgeting are actually one of the most important things for business success.

Why so? Because a plan allows you to get a better understanding of how you see your business, how you want to develop it, and so on. When you create a plan, you set targets that you want to achieve as well as define the ways of evaluating the success of your business.

Basically, planning gives you all the necessary tools that you can use to improve your business in the nearest future. However, this happens only when planning is done correctly.

What to Include in Your Annual Plan?

If you want to create a perfect business plan, you have to know what has to be included in it and how big it will be. Of course, there are no strict limitations to a size of a business plan as each business is different. However, if you are doing it for the first time, I recommend starting with a yearly plan: it is not too big and not too short.

A good annual plan has to include the following things:

• an executive summary
• a list of products and services you offer (or plan to offer this year)
• a detailed description of your target market
• a financial plan
• a marketing plan as well as a sales plan
• milestones and metrics
• a description of your management team

In order to write it in the best way possible, you need to spend some time thinking about the current status of your company as well as how it should look like by the end of the year. Describe your target market, think about the goals that have to be achieved this year, about the products and services that have to be launched.

Visualize the information to make it easier for you to see the whole picture (this is especially important for those, who don’t have much experience in planning). You can use charts, and different diagram types such as mind maps to visualize and organize your ideas and plans.

Try choosing a few main goals for your company and add them to the annual plan being as specific as possible: for example, if you want to increase your earnings, you should specify by how much (10%, 15%, etc.). It’s also good to think about the obstacles you might face and come up with some ways to minimize the potential risks that could occur.

Remember that while a business plan has to be specific and detailed when you write it, it shouldn’t remain static by the end of the year. No business is predictable enough for this to happen: you should understand it and prepare to act quickly, adding changes to a business plan if something unexpected happens.

Business Planning Cycle

As I said, typical business planning isn’t a static thing – actually, it’s a cycle that usually looks like this:

• You take some time to evaluate the effectiveness of your business. In order to do so, you should compare its current performance with the last year’s one – or with targets set earlier this year.
• Then you have to think about opportunities that might appear as well as the threats you might face.
• Remember about both successes and failures your business experienced throughout last year. Analyze them and think what can be done to repeat/avoid them.
• Think of the main business goals you would like to achieve and be sure to add them to the new annual plan (or edit the old one according to them).
• Create a budget.
• Come up with budget targets.
• Complete the plan.
• Be sure to review it regularly (every month, every three months, etc.), making changes if necessary.

Repeat the whole cycle.

Business Planning and Budgeting

When a business is still small and growing, it might seem unnecessary to plan its budget. However, it’s crucial if you want to avoid financial risks and be able to invest in opportunities when they appear.

Moreover, with the rapid growth of your business, you might find yourself in a situation where you aren’t able to control all the money anymore. Expansion of the business usually includes the creation of different departments responsible for different things – and each of these departments needs to have its own budget.

As you see, the bigger your business becomes, the more complicated it gets. While it’s okay to not control every cent by yourself, it is still up to you to make sure that your business keeps growing instead of becoming unprofitable. That’s why it’s so important to create a budget plan that allows you to understand the exact income your business brings by the end of the month and the amount of it, you are able to save or spend on different things.

It is important to remember that a business plan is not a forecast in any way. It doesn’t predict how much money you’ll make by the end of the year. Instead, it’s a tool for ensuring that your business will remain profitable even after covering all the necessary expenses.

Moreover, a business plan also ensures that you’ll have the opportunity to invest money into future projects, fund everything that has to be funded this year, and meet all of the business objectives.

Benefits of a Business Budget

The whole budget planning has a lot of benefits:

It allows you to evaluate the success of your business: when you know exactly how much profit your business gave you at the beginning of the year, you are able to compare it with the profit by the end of the year, understanding whether your financial goals have been met or not.

It allows managing money effectively: for example, if you save money for predicted one-time spends, you won’t be caught by surprise by them.

It helps identify the problems before they actually happen: for example, if you evaluate your budget and see that the income left after covering all the expenses is quite small, you’ll understand that you need to make more profit this year.

It helps make smarter decisions, by only investing money that you can afford to invest.

It allows you to manage your business more effectively, allocating more resources to the projects that need them the most.

It helps in increasing staff motivation.

Basically, when you have a budget plan ready, you have your back covered.

How to Create a Budget?

There are so many articles written on how to create a perfect business budget, but most of them narrow down to these 5 simple things:

• Evaluate your sources of income. You have to find out how much money your business brings on a daily basis in order to understand how much money you can afford to invest and spend.
• Make a list of your fixed expenses. These ones repeat every month and their amount doesn’t change. Some people forget to exclude the sum needed to cover these expenses from the monthly income, but it’s important to do so in order to get a clear understanding of your budget.
• Don’t forget about variable expenses. These ones don’t have a fixed price but still have to be paid every month. Come up with an approximate sum you’ll have to pay and include it in your budget.
• Predict your one-time expenses. Every business needs them from time to time, but if you plan your budget forgetting about these expenses, spending money on them could affect it greatly and not in a positive way.
• When you list all the income and expense sources, it’s time to pull them all together. Evaluate how much money you’ll have each month after you cover all these expenses. Then think of what part of that sum you could afford to invest into something.

While a whole process of budget creation might seem too complicated, you still should find time to do it. It’s totally worth the effort – moreover, such a plan could help you not only throughout the next month but also throughout the next year (if your expense and income sources won’t change much).

Of course, it’s still important to review it from time to time, making changes when necessary. However, the review process won’t be as complicated as the creation of a budget plan from scratch.

Key Steps in Drawing up a Budget

If you’ve never created a budget plan before, you could make some budgeting mistakes . However, when it comes to financial planning, the smallest mistake could have a negative impact. The following tips can help you easily avoid most mistakes, making your budget plan more realistic.

• Try to take it slow

The more time you spend on budgeting, the better it is for you. It’s hard to create a flawless budget plan quickly: there’s a big chance you might miss something. That’s why it’s vital to make sure that you’ve listed all the sources of your income and expenses, and are prepared well.

• You can use last year’s data

Last year’s data could help you see the whole picture better: you can compare it with this year’s data, finding out whether your income has increased or decreased. However, you should use it only for comparing and as a guide. You have new goals and resources this year, and the environment you’re working in has changed too, so your current planning and strategies should differ from the ones you used last year.

• Make sure that a budget is realistic

The most important thing about a budget plan is that it has to cover not only predictable expenses but also less predictable ones. Of course, making predictions is hard but using previous data along with some other business plans as examples could make the whole process easier.

A budget also has to be detailed: the information it contains has to allow you to monitor all the key details of your business, be it sales, costs, and so on. You could also use some accounting software for more effective management.

• It’s okay to involve people

If your business is big enough, you probably have some employees responsible for a part of the financial operations. It’s good to involve them in a budget creation process too, using their knowledge and experience to predict some expenses, for example. If the people you involve are experienced enough, the combination of their professionalism and your knowledge will make a budget more realistic and effective.

• Visualizing helps

Various charts and diagrams are so popular in business for a reason: they allow tracking your incomes and expenses easily. For example, you can create one chart based on your plan and another chart based on an actual budget and compare them during planned revisions to see whether your budget plan works just as expected or not.

As I mentioned above, it’s easier to control finances when you are running a small business. Such business needs only one budget that is created for a certain period – in most cases, for a year. Larger businesses, however, require something else. They have various departments, so it is better to create several budgets at once, tailoring each of them to a certain department’s needs.

Don’t Forget to Review!

I’ve already mentioned that a review is an important process of every business planning and budgeting. No matter how good your plan is, it is impossible to predict everything with 100 percent accuracy. Your business will grow and the environment around it will change, so the quicker you’ll react to such changes, the better it is for you.

That’s why you should schedule budget reviews from time to time. I recommend starting with reviewing it every month and then switching to a more comfortable schedule. Every month review can help you notice the flaws of your plan (which is especially important if you don’t have much experience in this kind of thing) as well as understand how stable your business is.

If you see that you don’t have to make changes often, you could start reviewing your plan every three or six months (however, I recommend doing it more often).

You can use various common diagrams to help you . The best thing about diagrams is that they help visualize data well, which is very important when you need to see the whole picture more clearly – and this happens often during budget planning. For example, a diagram or a chart of your company’s income can show you how much your finances have grown during a certain period. Moreover, if you notice certain downfalls in a chart (that aren’t predicted), you’ll be able to react to it quickly, fixing things that went wrong.

What do you need to consider during the whole review process? First, your actual income. Probably it will be different each month: every business has its own peak sales periods and drop sales ones, and you have to find them and remember them for more effective planning next year. It is important to check whether the income matches the one you predicted or not: if not, you have to find out why it happened.

Second, you have to evaluate your actual expenses. See if they differ from your budget, how much do they affect it, why they exceed your expectations (if they do), and so on.

Probably the best thing about reviewing is that it allows you to react to all the unexpected situations quickly, saving your business from the potential troubles and downfalls. So be sure not to skip it.

As you see, writing a business plan is a complex process. You have to be very attentive, to plan everything, starting with your goals and ending with your expenses, to consider so many things and to involve other people in planning if possible. Moreover, you also have to learn all the time, reviewing your plans, making changes, finding the ways to react to unexpected situations.

But while this might look like a tough thing to do, it is very convenient for everyone who wants to manage their business successfully. The planning takes a lot off your shoulders and makes the whole business running process easier. You are able to evaluate the effectiveness of your business by looking at the monthly income increase, at the goals you wanted to achieve, and so on. You are also able to predict the potential downfalls of your business and to use the tools you have to minimize all the risks.

You are able to evaluate the effectiveness of your business by looking at the monthly income increase, at the goals you wanted to achieve, and so on. You are also able to predict the potential downfalls of your business and to use the tools you have to minimize all the risks.

I hope that this guide will help you create strong and realistic budget and business plans, and successfully implement them in running your business. If you have some tips on business and budget planning that you want to share, please do so in the comment section below!

Author’s Bio:

Kevin Nelson started his career as a research analyst and has changed his sphere of activity to writing services and content marketing. Apart from writing, he spends a lot of time reading psychology and management literature searching for the keystones of motivation ideas. Feel free to connect with him on Facebook , Twitter , Google+ , Linkedin .

Join over thousands of organizations that use Creately to brainstorm, plan, analyze, and execute their projects successfully.

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Budgeting and business planning

Once your business is operational, it's essential to plan and tightly manage its financial performance. Creating a budgeting process is the most effective way to keep your business - and its finances - on track.

This guide outlines the advantages of business planning and budgeting and explains how to go about it. It suggests action points to help you manage your business' financial position more effectively and ensure your plans are practical.

Planning for business success

The benefits, what to include in your annual plan, a typical business planning cycle, budgets and business planning, benefits of a business budget, creating a budget, key steps in drawing up a budget, what your budget should cover, what your budget will need to include, use your budget to measure performance, review your budget regularly.

When you're running a business, it's easy to get bogged down in day-to-day problems and forget the bigger picture. However, successful businesses invest time to create and manage budgets, prepare and review business plans and regularly monitor finance and performance.

Structured planning can make all the difference to the growth of your business. It will enable you to concentrate resources on improving profits, reducing costs and increasing returns on investment.

In fact, even without a formal process, many businesses carry out the majority of the activities associated with business planning, such as thinking about growth areas, competitors, cashflow and profit.

Converting this into a cohesive process to manage your business' development doesn't have to be difficult or time-consuming. The most important thing is that plans are made, they are dynamic and are communicated to everyone involved. See the page in this guide on what to include in your annual plan.

The key benefit of business planning is that it allows you to create a focus for the direction of your business and provides targets that will help your business grow. It will also give you the opportunity to stand back and review your performance and the factors affecting your business. Business planning can give you:

• a greater ability to make continuous improvements and anticipate problems
• sound financial information on which to base decisions
• improved clarity and focus
• a greater confidence in your decision-making

The main aim of your annual business plan is to set out the strategy and action plan for your business. This should include a clear financial picture of where you stand - and expect to stand - over the coming year. Your annual business plan should include:

• an outline of changes that you want to make to your business
• potential changes to your market, customers and competition
• your objectives and goals for the year
• your key performance indicators
• any issues or problems
• any operational changes
• information about your management and people
• your financial performance and forecasts
• details of investment in the business

Business planning is most effective when it's an ongoing process. This allows you to act quickly where necessary, rather than simply reacting to events after they've happened.

• Review your current performance against last year/current year targets.
• Work out your opportunities and threats.
• Analyse your successes and failures during the previous year.
• Look at your key objectives for the coming year and change or re-establish your longer-term planning.
• Identify and refine the resource implications of your review and build a budget.
• Define the new financial year's profit-and-loss and balance-sheet targets.
• Conclude the plan.
• Review it regularly - for example, on a monthly basis - by monitoring performance, reviewing progress and achieving objectives.
• Go back to 1.

New small business owners may run their businesses in a relaxed way and may not see the need to budget. However, if you are planning for your business' future, you will need to fund your plans. Budgeting is the most effective way to control your cashflow, allowing you to invest in new opportunities at the appropriate time.

If your business is growing, you may not always be able to be hands-on with every part of it. You may have to split your budget up between different areas such as sales, production, marketing etc. You'll find that money starts to move in many different directions through your organisation - budgets are a vital tool in ensuring that you stay in control of expenditure.

A budget is a plan to:

• control your finances
• ensure you can continue to fund your current commitments
• enable you to make confident financial decisions and meet your objectives
• ensure you have enough money for your future projects

It outlines what you will spend your money on and how that spending will be financed. However, it is not a forecast. A forecast is a prediction of the future whereas a budget is a planned outcome of the future - defined by your plan that your business wants to achieve.

There are a number of benefits of drawing up a business budget, including being better able to:

• manage your money effectively
• allocate appropriate resources to projects
• monitor performance
• meet your objectives
• improve decision-making
• identify problems before they occur - such as the need to raise finance or cash flow difficulties
• plan for the future
• increase staff motivation

Creating, monitoring and managing a budget is key to business success. It should help you allocate resources where they are needed, so that your business remains profitable and successful. It need not be complicated. You simply need to work out what you are likely to earn and spend in the budget period.

Begin by asking these questions:

• What are the projected sales for the budget period? Be realistic - if you overestimate, it will cause you problems in the future.
• What are the direct costs of sales – i.e. costs of materials, components or subcontractors to make the product or supply the service?
• What are the fixed costs or overheads?

You should break down the fixed costs and overheads by type, e.g.:

• cost of premises, including rent, municipal taxes and service charges
• staff costs –e.g. wages, benefits, Québec Parental Insurance Plan (QPIP) premiums, contributions to the Québec Pension Plan (QPP) and to the financing of the Commission des normes du travail (CNT)
• utilities – e.g. heating, lighting, telephone
• printing, postage and stationery
• vehicle expenses
• equipment costs
• advertising and promotion
• travel and subsistence expenses
• legal and professional costs, including insurance

Your business may have different types of expenses, and you may need to divide up the budget by department. Don't forget to add in how much you need to pay yourself, and include an allowance for tax.

Your business plan should help in establishing projected sales, cost of sales, fixed costs and overheads, so it would be worthwhile preparing this first. See the page in this guide on planning for business success.

Once you've got figures for income and expenditure, you can work out how much money you're making. You can look at costs and work out ways to reduce them. You can see if you are likely to have cash flow problems, giving yourself time to do something about them.

When you've made a budget, you should stick to it as far as possible, but review and revise it as needed. Successful businesses often have a rolling budget, so that they are continually budgeting, e.g. for a year in advance.

There are a number of key steps you should follow to make sure your budgets and plans are as realistic and useful as possible.

Make time for budgeting

If you invest some time in creating a comprehensive and realistic budget, it will be easier to manage and ultimately more effective.

Use last year's figures - but only as a guide

Collect historical information on sales and costs if they are available - these could give you a good indication of likely sales and costs. But it's also essential to consider what your sales plans are, how your sales resources will be used and any changes in the competitive environment.

Create realistic budgets

Use historical information, your business plan and any changes in operations or priorities to budget for overheads and other fixed costs.

It's useful to work out the relationship between variable costs and sales and then use your sales forecast to project variable costs. For example, if your unit costs reduce by 10 per cent for each additional 20 per cent of sales, how much will your unit costs decrease if you have a 33 per cent rise in sales?

Make sure your budgets contain enough information for you to easily monitor the key drivers of your business such as sales, costs and working capital. Accounting software can help you manage your accounts.

Involve the right people

It's best to ask staff with financial responsibilities to provide you with estimates of figures for your budget - for example, sales targets, production costs or specific project control. If you balance their estimates against your own, you will achieve a more realistic budget. This involvement will also give them greater commitment to meeting the budget.

Decide how many budgets you really need. Many small businesses have one overall operating budget which sets out how much money is needed to run the business over the coming period - usually a year. As your business grows, your total operating budget is likely to be made up of several individual budgets such as your marketing or sales budgets.

Projected cash flow  -your cash budget projects your future cash position on a month-by-month basis. Budgeting in this way is vital for small businesses as it can pinpoint any difficulties you might be having. It should be reviewed at least monthly.

Costs  - typically, your business will have three kinds of costs:

• fixed costs - items such as rent, salaries and financing costs
• variable costs - including raw materials and overtime
• one-off capital costs - purchases of computer equipment or premises, for example

To forecast your costs, it can help to look at last year's records and contact your suppliers for quotes.

Revenues  - sales or revenue forecasts are typically based on a combination of your sales history and how effective you expect your future efforts to be.

Using your sales and expenditure forecasts, you can prepare projected profits for the next 12 months. This will enable you to analyse your margins and other key ratios such as your return on investment.

If you base your budget on your business plan, you will be creating a financial action plan. This can serve several useful functions, particularly if you review your budgets regularly as part of your annual planning cycle.

Your budget can serve as:

• an indicator of the costs and revenues linked to each of your activities
• a way of providing information and supporting management decisions throughout the year
• a means of monitoring and controlling your business, particularly if you analyse the differences between your actual and budgeted income

Benchmarking performance

Comparing your budget year on year can be an excellent way of benchmarking your business' performance - you can compare your projected figures, for example, with previous years to measure your performance.

You can also compare your figures for projected margins and growth with those of other companies in the same sector, or across different parts of your business.

Key performance indicators

To boost your business' performance you need to understand and monitor the key "drivers" of your business - a driver is something that has a major impact on your business. There are many factors affecting every business' performance, so it is vital to focus on a handful of these and monitor them carefully.

The three key drivers for most businesses are:

• working capital

Any trends towards cash flow problems or falling profitability will show up in these figures when measured against your budgets and forecasts. They can help you spot problems early on if they are calculated on a consistent basis.

To use your budgets effectively, you will need to review and revise them frequently. This is particularly true if your business is growing and you are planning to move into new areas.

Using up to date budgets enables you to be flexible and also lets you manage your cash flow and identify what needs to be achieved in the next budgeting period.

Two main areas to consider

Your actual income  - each month compare your actual income with your sales budget, by:

• analysing the reasons for any shortfall - for example lower sales volumes, flat markets, underperforming products
• considering the reasons for a particularly high turnover - for example whether your targets were too low
• comparing the timing of your income with your projections and checking that they fit

Analysing these variations will help you to set future budgets more accurately and also allow you to take action where needed.

Your actual expenditure  - regularly review your actual expenditure against your budget. This will help you to predict future costs with better reliability. You should:

• look at how your fixed costs differed from your budget
• check that your variable costs were in line with your budget - normally variable costs adjust in line with your sales volume
• analyse any reasons for changes in the relationship between costs and turnover
• analyse any differences in the timing of your expenditure, for example by checking suppliers' payment terms

Original document, Budgeting and business planning , © Crown copyright 2009 Source: Business Link UK (now GOV.UK/Business ) Adapted for Québec by Info entrepreneurs

Our information is provided free of charge and is intended to be helpful to a large range of UK-based (gov.uk/business) and Québec-based (infoentrepreneurs.org) businesses. Because of its general nature the information cannot be taken as comprehensive and should never be used as a substitute for legal or professional advice. We cannot guarantee that the information applies to the individual circumstances of your business. Despite our best efforts it is possible that some information may be out of date.

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Budgeting Process: Steps and Best Practices for Planning a Budget

• Written by Keith Murphy
• 19 min read

KEY TAKEAWAYS

• Budgeting is crucial to ensure your business has enough money to remain operational and earn profit.
• Using financial tools can help save time and resources while improving accuracy in the budgeting process.
• Whether you have a small business or a large corporation, the basic steps and best practices for managing budgets are the same.

Budgeting is a vital aspect of financial management that helps businesses allocate resources effectively, control costs, and achieve their financial goals.

In this article, we will discuss the typical steps involved in the budgeting process, the challenges of forecasting, best practices for effective business budgeting.

We will also look at how spend management software , like Planergy, can help keep track of expenses and control spending within budget limits.

Why is Business Budgeting Important?

Business budgeting plays a crucial role in the financial success of a company. Regardless of size, all companies must have an annual budget for every fiscal year.

Larger companies may have a budget committee in charge of creating multiple types of budgets , including operating budgets and departmental budgets .

The end goal should be a detailed budget that covers everything you expect to spend, plus some excess for discretionary spending.

Budgeting should be part of regular financial planning. As you make budget decisions, consider:

• Available funds
• Capital expenditures and operating expenses, including variable and fixed costs
• Plans for the next fiscal year

Use documents such as your:

• Income statement
• Cash flow statement
• Utility bills
• Payroll documents

These documents will help you develop your master budget. Use your business plan as a guide if it’s your first year in business. 

If you’ve been in business for a while, you can use information from the prior year to help you set up the budget.

This is the case unless you are using a zero based budgeting approach.

Sets Financial Goals and Objectives

A well-prepared budget serves as a roadmap for your business’s financial growth. By setting clear financial targets, you can align your business strategies with your desired outcomes, such as increased revenue, reduced expenses, or higher profitability.

Budgeting also helps you prioritize investments and allocate resources to achieve these objectives effectively.

Allocates Resources Efficiently

Business budgeting lets you analyze your company’s financial needs and distribute resources accordingly.

This ensures that each department or project receives adequate funding, vital for smooth operations and achieving your business goals.

Efficient resource allocation also helps you avoid overspending and maintain a healthy cash flow .

Identifies Potential Financial Problems Before They Arise

Regular budgeting lets you spot financial issues early on, such as declining sales, rising costs, or cash flow shortages.

By identifying these problems in advance, you can take proactive measures to address them, such as cutting unnecessary expenses, renegotiating contracts, or seeking additional funding.

This ensures that your business remains financially healthy and avoids costly issues down the line.

Modern Software Reduces Budgeting Time & Effort

Many businesses still rely on outdated, manual budgeting methods, such as spreadsheets or pen and paper.

This can be time-consuming and error-prone, leading to inaccuracies in financial forecasting. By using modern budgeting software, businesses can dramatically reduce the time and effort required to generate accurate budgets.

Accurate real-time tracking and reporting on budget vs actual expenditure can avoid overspends and gives visibility of underspends so budgets can be adjusted or reallocated as needed.

Business budgeting software automates many of the manual processes, allowing you to quickly develop comprehensive financial plans without sacrificing accuracy or detail.

This can provide peace of mind that your business’ finances are well-managed and help enable more informed decision making, and easier financial reporting.

Measures Business Performance Against Established Benchmarks

A budget is a benchmark against which you can compare your financial performance. This enables you to evaluate your company’s progress toward its financial goals and identify areas that need improvement.

Regularly reviewing your budget and adjusting it based on your business’s performance helps you stay on track and make informed decisions.

Helps Decision-Making and Long-Term Planning

Budgeting provides valuable insights into your business’s financial health and future prospects. These insights are essential for making strategic decisions, such as expanding into new markets, launching new products, or acquiring other businesses.

Additionally, a well-structured budget can help you plan for long-term growth by identifying opportunities for cost reduction, revenue generation, and investment.

No matter what your budget looks like, set aside some funds to account for unexpected expenses or overages.

Steps in the Budgeting Process

Budgeting is a crucial aspect of financial management that helps businesses plan and allocate resources effectively. 

It typically involves the following steps:

Setting Financial Objectives

Start by determining your short-term and long-term financial goals, such as increasing revenue, reducing costs, or improving profitability.

These objectives should be specific, measurable, achievable, relevant, and time-bound (SMART) to ensure they are realistic and attainable .

Gathering Historical Data

Review past financial statements, records, and reports to gain insights into your business’s financial performance and trends. This can include a budget analysis report and budget variance analysis .

This information will help you identify areas of strength and weakness and opportunities for improvement and growth.

Using spend management software, like Planergy, will allow you to gain real-time spend visibility and make better decisions.

Forecasting Revenues and Expenses

Based on historical data, market research, and industry trends, estimate future sales, costs, and other financial variables. Variable expenses can be difficult to budget for, so they need to be considered carefully .

Consider factors such as seasonality, economic conditions, and changes in your business operations when making these projections.

Preparing a Preliminary Budget

Create a draft budget that outlines your projected revenues, expenses, and cash flow.

This should include line items for each category of income and expenditure, as well as a summary of your overall financial position.

Reviewing and Adjusting

Analyze the preliminary budget to ensure it aligns with your financial objectives and accurately reflects your business’s anticipated financial performance.

Make any necessary adjustments, such as reallocating resources or revising revenue projections, to create a more accurate and realistic budget.

Implementation

Once your budget is finalized, communicate it to relevant stakeholders, such as department heads, employees, and investors.

Ensure that everyone understands the budget’s objectives and their role in achieving them. Integrate the budget into your business operations, using it as a guide for decision-making and resource allocation.

Monitor and Review

Regularly track your actual financial performance against the budget to identify any discrepancies or areas that require attention.

Review your budget periodically and adjust as needed to account for changes in your business environment or financial performance.

This ongoing monitoring and review process will help you stay on track and ensure that your budget remains an effective tool for managing your business’s finances.

Budget Forecasting Challenges

Economic uncertainty.

Unpredictable market conditions, such as consumer demand fluctuations, interest rate changes, or shifts in global economic trends, can impact your revenue projections and expense estimates.

Economic uncertainty makes it difficult to accurately predict your business’s financial performance, which can lead to over- or underestimating your budgetary needs.

To address this challenge, consider using multiple scenarios (optimistic, realistic, and pessimistic) in your budget forecasting process to account for potential variations in market conditions.

Inaccurate Historical Data

Your budget forecasts rely heavily on historical reporting data to project future revenues and expenses. Incomplete or incorrect historical data can lead to flawed forecasts, resulting in unrealistic budget expectations and poor decision-making.

To overcome this challenge, maintain accurate and up-to-date financial records, and review them regularly for errors or inconsistencies.

Use industry benchmarks and market research to supplement your historical data and provide a more comprehensive view of your business’s financial outlook.

Changes in Business Operations

Significant changes in your business operations, such as new product launches, acquisitions, or changes in your supply chain, can impact your budget projections.

These changes may introduce new revenue streams or alter your cost structure, making it challenging to forecast your business’s financial performance accurately. For example, a significant increase in operations can result in a decrease in cash flow .

To address this challenge, closely monitor any changes in your business operations and incorporate them into your budget forecasts.

This may involve updating your revenue projections, adjusting your expense estimates, or reallocating resources to accommodate the changes.

Benefits of Business Budgeting

Improved financial control.

Budgeting helps you monitor and manage your business’s finances more effectively. By setting financial targets and allocating resources accordingly, you can track your company’s performance and ensure it stays on track to achieve its goals.

A well-prepared budget also enables you to identify areas where cost savings can be made, or resources can be reallocated to maximize efficiency.

Enhanced Decision-Making

A well-prepared budget provides valuable insights for strategic planning and decision-making.

By analyzing your projected revenues and expenses, you can identify growth opportunities, prioritize investments, and make informed decisions about your business’s operations.

Budgets also serve as a reference point for evaluating the financial impact of various alternatives, helping you choose the most cost-effective and beneficial options for your company.

Better Risk Management

By identifying potential financial issues early on, budgeting allows you to mitigate business risks and implement contingency plans.

Regularly monitoring your budget helps you spot potential problems, such as cash flow shortages or declining revenues, before they become critical.

This proactive approach to risk management allows you to address issues in a timely manner and minimize their impact on your business’s financial health.

Increased Profitability

Effective budgeting helps optimize resource allocation and control costs , increasing profits.

By carefully planning your expenses and analyzing your procurement spend you can identify areas where cost savings can be achieved, you can reduce unnecessary spending and improve your company’s bottom line.

A well-structured budget can help you identify new revenue opportunities and invest in initiatives to drive growth and profitability.

Best Practices for Business Budgeting

To ensure effective business budgeting you should consider following these best practices:

Involve Relevant Stakeholders

Include employees from different departments to gather diverse perspectives and insights.

Involving key stakeholders in the budgeting process ensures a more comprehensive understanding of the company’s financial needs and promotes buy-in and commitment to achieving budget goals.

Use Current, Accurate Data

Base your revenue and expense projections on accurate, up-to-date information. If the information is not accurate or not up to date you can be sure your budget will have the same problem.

Be Realistic with Expectations

Avoid overly optimistic or pessimistic assumptions that could lead to unrealistic expectations and poor decision-making. Use historical data and industry benchmarks to create a more reliable and achievable budget.

Adjust for Seasonality

Consider seasonal fluctuations in sales and expenses when creating your budget. Many businesses experience variations in demand and costs throughout the year due to factors like holidays, weather, and consumer behavior.

Incorporating these fluctuations into your budget can help you better plan for and manage resources during peak and off-peak periods.

Use a Rolling Forecast

Update your budget regularly to account for market conditions and business operations changes. A rolling forecast is an approach where you continually update your projections for a set period (e.g., 12 months) as new data becomes available.

This enables you to maintain a more accurate and up-to-date financial outlook, allowing for quicker strategy and resource allocation adjustments as needed.

How Can Software Help You Manage Your Budget?

Spend management software like Planergy can help you manage your budget by:

Streamlining Data Collection

Spend management software like Planergy can help you manage your budget by automatically importing financial data from various sources.

This saves time and reduces errors by eliminating manual data entry and ensuring your budget is based on accurate, up-to-date information.

Facilitating Better Collaboration

Enable team members to work together on business budget planning and review processes using spend management software.

This fosters better communication and collaboration among stakeholders, allowing for a more comprehensive understanding of the company’s financial needs and promoting commitment to achieving budget goals.

Providing Real-Time Insights

Generate reports and dashboards with spend management software that allows you to monitor your financial performance in real-time.

This enables you to quickly identify trends, discrepancies, and areas of concern, allowing for more informed decision-making and timely adjustments to your budget and strategy.

Improving Expense Tracking

Track expenses against your budget with ease using spend management software, and identify areas where spending can be controlled.

This helps ensure your business stays within budget, allowing for more effective resource allocation and improved financial performance.

Simplify Business Budgeting with Planergy

Effective business budgeting is crucial for managing your company’s finances, making informed decisions, and achieving financial goals.

By following best practices and leveraging spend management software like Planergy, you can create an accurate and comprehensive budget that supports your business’s long-term success.

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Planning, budgeting and forecasting is typically a three-step process for determining and mapping out an organization’s short- and long-term financial goals.

• Planning  provides a framework for a business’ financial objectives — typically for the next three to five years.
• Budgeting  details how the plan will be carried out month to month and covers items such as revenue, expenses, potential cash flow and debt reduction. Traditionally, a company will designate a fiscal year and create a budget for the year. It may adjust the budget depending on actual revenues or compare actual financial statements to determine how close they are to meeting or exceeding the budget.
• Forecasting  takes historical data and current market conditions and then makes predictions as to how much revenue an organization can expect to bring in over the next few months or years. Forecasts are usually adjusted as new information becomes available. 

The process is usually managed by a chief financial officer (CFO) and the finance department. However, the definition can be expanded to include all areas of organizational planning including: financial planning and analysis , supply chain planning , sales planning , workforce planning and marketing planning .

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Basic business accounting practices date as far back as the 1400s, when Venetian investors kept track of their Asian trade expeditions using double-entry bookkeeping, income statements and balance sheets. The word “budget” is from the old French word “bougette,” meaning “small purse.” The British government began to use the phrase “open the budget” in the mid-1700s, when the chancellor presented the annual financial statements. Businesses began to regularly use the term “budget” for their finances by the late 1800s.

Modern business forecasting began in response to the economic devastation of the Great Depression of the 1930s. New types of statistics and statistical analyses were developed that could help business better predict the future. Consulting firms emerged to help companies use these new prediction tools.

Accounting and forecasting were difficult in the early 20th century because they depended on laborious hand-written equations, ledgers and spreadsheets. The emergence of mainframe computers in the 1960s and personal computers in the 1980s sped up the process. Software applications such as Microsoft Excel became widely popular for financial reporting. However, Excel programs and spreadsheets were prone to input errors and cumbersome when various departments or individuals needed to collaborate on a report.

By the start of the 2000s, companies gained access to ever-growing operational data sources, as well as information outside corporate transaction systems — such as weather, social sentiment and econometric data. The vast amounts of available data for forecasting created a need for more sophisticated software tools to process it.

Numerous planning software packages emerged to handle this data complexity, making planning, budgeting and forecasting faster and easier — both for processing and collaboration. With predictive insights drawn automatically from data, companies could identify evolving trends and guide decision making with foresight, not just hindsight.

Today, cloud-based systems are becoming the standard, providing more flexibility, security and cost savings — helping organizations generate accurate predictions and budgets with fewer errors.

But despite these advancements, businesses are still quite dependent on traditional spreadsheets. 1   Seventy percent of businesses say they rely heavily on spreadsheet reporting, with only 16 percent using on-premise specialist software — and only ten percent using cloud software for planning.

Many businesses still base their strategy on annual plans and budgets, which is a management technique developed over a century ago. But in today’s more competitive environment, organizations are realizing that plans, budgets and forecasts need to reflect current reality — not the reality of two, three or more quarters ago. Continuous planning and rolling forecasts are becoming widely used methodologies to update plans, budgets and forecasts frequently throughout the year, on a quarterly or even monthly basis. These approaches help managers spot trends before their competitors — helping them make better informed, more agile decisions about pricing, product mix, capital allocations and even staffing levels.

Creating and implementing a sound planning, budgeting and forecasting process helps organizations establish more accurate financial report and analytics — potentially leading to more accurate forecasting and ultimately revenue growth. Its importance is even more relevant in today’s business environment where disruptive competitors are entering even the most tradition-bound industries.

When companies embrace data and analytics in conjunction with well-established planning and forecasting best practices, they enhance strategic decision making and can be rewarded with more accurate plans and more timely forecasts. Overall, these tools and practices can save time, reduce errors, promote collaboration and foster a more disciplined management culture that delivers a true competitive advantage.

Specifically, companies are able to:

• Quickly update plans and forecasts in response to new threats and opportunities, identifying risk areas early enough to rectify issues before they are serious.
• Identify and analyze the impact of changes as they occur.
• Strengthen the links between operational and financial plans.
• Better plan and predict cash flows.
• Improve communication and collaboration among plan contributors.
• Consistently deliver timely, reliable plans and forecasts, plus contingency plans, for a range of possible events.
• Analyze variances and deviations from plans and promptly take corrective action.
• Create a budget specifically for growth and having confidence in how much can be spent.
• More accurately manage sales pipelines while tracking performance against targets.
• Make more confident strategic decisions based on hard data, instead of hopes or guesswork.
• Provide evidence of an organization’s future trajectory to potential investors and lending institutions based on multiple data sources and sophisticated analysis.

Budgeting, planning and forecasting software can be purchased as an off-the-shelf solution or as part of a larger integrated corporate performance management (CPM) solution.

Advanced software solutions enable organizations to:

• Measure and monitor performance through interactive, self-service dashboards and visualizations.
• Examine root-causes with high-fidelity analysis of dimensionally rich data.
• Evaluate trends and make predictions automatically from internal or external data.
• Perform rapid what-if scenario modelling and create timely, reliable plans and forecasts.

Planning is easier and more effective when practitioners follow well-established best practices. Software solutions that support these practices can enhance the timeliness and reliability of information and increase participation by key people throughout the organization; especially those at the front lines.

Leading companies have moved to solutions that address the full planning cycle — data collection, modeling, analytics and reporting — on a common planning platform with lean infrastructure requirements. Such platforms can handle a diverse range of business functions, from budget-focused finance tasks to, for example, supply chain-focused planning for retail environments with thousands of SKUs (stock keeping units).

Companies like IBM offer holistic, integrated software solutions to streamline the planning, budgeting and forecasting process. The logic is that to adapt to today's quickly changing business conditions, an organization needs one solution that creates a single source of truth and visibility into all its data. These solutions can extend well beyond the financial aspects of the business, becoming a powerful forecasting engine across the enterprise. With these agile planning and exploratory analytics software solutions — whether in the cloud or on-premises — companies can perform planning, budgeting and forecasting with greater speed, agility and foresight.

Evaluating and selecting planning, budgeting and forecasting software is a complex task. It requires careful consideration of the software’s functionality, its value to the planning process and its ability to support planning best practices. There are also factors such as vendor reliability and support, user community connections and commitment to customer success once the sale is complete.

IBM Analytics  recently published a guide to help organizations evaluate planning, budgeting and forecasting software — identifying key qualities to look for:

• Adaptive . Can you rapidly change models and re-forecast frequently, based on input from business units? Can you update plans as often as necessary?
• Timely . Is your information always current because users contribute directly to a central planning database? Are your consolidations and rollups done automatically to easily meet deadlines?
• Integrated . Do your planning, analysis, workflow and reporting functions reside on one common platform, reducing the need to maintain “shadow” planning systems?
• Collaborative . Is your solution web-based? Does it enable participation anytime, from anywhere with a secure connection?
• Self-service . Are users able to access data and perform complex analysis without the assistance of IT? Are you able to use a familiar spreadsheet interface for faster user adoption and accelerate time to value?
• Enterprise-scale data capacity . Is your solution capable of handling very large data volumes without limiting cube size? Some solutions do not handle “data sparsity” well — forcing data to be split into multiple cubes for analysis, causing version control issues.
• Efficient . Are your managers able to spend less time managing data and more time managing the business?
• Relevant . Do you have the ability to customize views for different user roles, to help increase adoption and process ownership? Do you have formula capabilities that enable modeling of all relevant business drivers?
• Accurate . Do your plans contain errors because of broken links, stale data, improper rollups and missing components?

The key is not just evaluating product features and capabilities, but also evaluating how those features will be implemented by different users within the organization. It’s important to test any planning solution that will be used by a large variety of stakeholders such as finance, operations, HR and sales.

Discover how one of the largest operators of parking facilities in the Middle East used IBM Planning Analytics to deliver better automation and multidimensional analytical power along with cost advantages.

Learn how the real estate developer enhanced its core planning, forecasting and project management capabilities with IBM technology to drive even greater profitability.

Find out how the company used IBM planning analytics to provide monthly and weekly reporting for engineering, marketing, sales and operations.

IBM Planning Analytics provides a single solution to automate planning, budgeting and forecasting for your enterprise.

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A comprehensive solution that provides power and flexibility for streamlined, best-practice financial consolidation and reporting.

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Learn how companies are delivering dependable business forecasts and optimizing the allocation of resources.

Learn the five common drawbacks to spreadsheets as planning tools

Discover the benefits of embracing data and analytics in conjunction with well-established planning and forecasting best practices.

See how you can synthesize information, uncover trends and deliver insights to improve decision making throughout the enterprise.

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See how headcount planning is done with IBM Planning Analytics in a quick, click-through demo.

Predict outcomes with flexible AI-infused forecasting and analyze what-if scenarios in real-time. IBM Planning Analytics is an integrated business planning solution that turns raw data into actionable insights. Deploy as you need, on premises or on cloud.

1 The Future of Planning, Budgeting and Forecasting Global Survey, Workday and FSN, 2017  (link resides outside ibm.com)

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Business Budgeting Made Easy: A Beginner’s Guide to Success

Creating a business budget is a critical step for financial success , yet many business owners find themselves unsure where to start. Understanding how to craft an effective budget can make the difference between thriving and merely surviving in today’s competitive market.

An approach to budgeting involves examining revenue , setting realistic spending goals , and implementing practical strategies for both monthly and long-term financial planning . By utilizing helpful tools and templates , even beginners can demystify the process and gain confidence in their budgeting abilities.

With the right knowledge and approach, business owners can develop comprehensive budgets that support informed decision-making and foster sustainable growth . Mastering this essential skill empowers entrepreneurs to manage their financial future and understand the aspects of business finance with confidence.

The Importance Of Business Budgets

A well-crafted business budget is the cornerstone of financial success for any enterprise, regardless of its size or industry. It serves as a roadmap for your company’s financial future, providing clarity and direction in an often uncertain business environment.

By prioritizing the creation and maintenance of a detailed budget , you’re taking a proactive approach to keeping track of business expenses and ensuring the long-term viability of your business. With a clear understanding of your income and expenses , you can make informed decisions about investments , expansions , and reducing business expenses .

Guiding Financial Decision-Making

A well-structured budget is an invaluable tool for managing the finances of your business . It provides a framework for evaluating financial decisions, helping you determine whether a particular expenditure aligns with your overall business goals .

By referring to your budget, you can:

• Allocate resources more effectively
• Identify areas where costs can be reduced
• Make informed decisions about pricing strategies
• Plan for future growth and expansion

Facilitating Goal Setting and Performance Tracking

Your business budget serves as a benchmark for measuring your company’s financial performance . By setting clear financial goals and regularly comparing actual results to your budgeted figures, you can monitor your progress and identify areas of overperformance or underperformance.

This process allows you to:

• Make timely adjustments to your strategies
• Motivate your team by setting achievable targets
• Continuously improve your financial planning

Improving Cash Flow Management

Effective cash flow management is crucial for the survival and growth of any business. A well-planned budget helps you forecast cash inflows and outflows , identifying potential cash shortages in advance.

This foresight enables you to:

• Plan for seasonal fluctuations in revenue
• Ensure sufficient funds to cover operational expenses and investments
• Make informed decisions about timing of large purchases or investments

Enhancing Stakeholder Confidence

A detailed and realistic budget demonstrates financial responsibility and strategic planning to stakeholders such as investors , lenders , and partners . It shows that you have a clear vision for your business and are committed to its success.

This can lead to several benefits:

• Improved chances of securing funding
• Strengthened relationships with suppliers and creditors
• Increased attractiveness to potential investors or business partners

By recognizing the importance of business budgets and implementing a robust budgeting process , you’re laying the foundation for financial stability and long-term success . A well-managed budget is your key to maneuvering economic uncertainties with confidence and responding swiftly to evolving market conditions.

Preparing For Budget Creation

Establishing a solid foundation is crucial before examining the financial details for a successful budgeting process. Careful planning helps create a detailed budget that supports your business objectives .

Gathering Financial Documents

Collecting all relevant financial documents is the first step in budget preparation. These may include income statements , balance sheets , cash flow statements , bank statements , tax returns , and receipts and invoices .

Having these documents readily available provides necessary historical data for informed projections and trend identification in your business’s financial performance.

Determining Your Budgeting Period

Decide on the timeframe for your budget, considering your business cycle , seasonal fluctuations , and industry-specific factors . While most businesses create annual budgets , breaking them down into monthly or quarterly segments allows for more frequent reviews and adjustments.

Categorizing Expenses (Fixed And Variable)

An essential part of budget preparation is classifying business expenses into fixed and variable costs . This categorization helps understand spending patterns and identify potential cost reduction areas .

Fixed expenses include:

• Rent or mortgage payments
• Insurance premiums
• Salaries for full-time employees
• Loan repayments

Variable expenses include:

• Raw materials or inventory
• Shipping costs
• Commissions or bonuses

Setting Financial Goals

Establish clear, measurable financial goals to guide budgeting decisions and prioritize spending. Consider setting SMART targets for revenue growth , profit margins , debt reduction , cash reserves , and investment in new equipment or technology .

Choosing Budgeting Tools

Select the right tools to create and manage your budget effectively. Options include spreadsheet software , accounting software , and budgeting apps designed for small businesses.

Choose a tool that fits your business’s needs and financial expertise level . Many software options offer templates and guides to simplify the budgeting process.

Involving Key Stakeholders

Engage relevant team members and stakeholders in the budget preparation process. This may include department heads , financial advisors or accountants , and key investors or board members .

Their input can provide valuable insights and ensure buy-in for the final budget. Thorough preparation sets the stage for a more accurate and useful financial plan , leading to better financial management for your business.

Step-By-Step Budget Creation Process

Crafting a detailed business budget is crucial for directing financial choices and realizing objectives . Follow these steps to develop a robust financial plan that will serve as a roadmap for your business success.

Projecting Your Revenue

Estimating your revenue in business is the first crucial step in budget creation. This process involves analyzing historical data , considering market conditions , accounting for seasonality , and setting realistic growth targets .

Create monthly revenue projections for the upcoming year, breaking them down by product or service line if applicable. Be conservative in your estimates to avoid overextending your resources.

Calculating Fixed Expenses

Identify and calculate your fixed expenses , which remain relatively constant regardless of your business’s performance.

Rent And Utilities

List all operational expenses related to your physical space:

• Property taxes
• Basic utilities (electricity, water, internet)

Salaries And Benefits

Account for all regular employee costs:

• Salaries and wages for full-time staff
• Payroll taxes
• Health insurance and other benefits
• Retirement contributions

Loan Payments And Subscriptions

Include any recurring financial obligations:

• Equipment leases
• Software subscriptions
• Professional memberships

Estimating Variable Expenses

Variable expenses fluctuate based on your business activity. Estimate these costs based on your revenue projections:

• Shipping and packaging
• Sales commissions
• Credit card processing fees
• Part-time or seasonal labor

Be sure to account for potential price increases in materials or services throughout the year.

Accounting For One-Time Expenses

Budget for occasional or one-time expenses such as equipment purchases, marketing campaigns, professional development, office renovations, and legal or consulting fees. Spread these costs across the year to avoid cash flow issues.

Determining Profit Margins

Calculate your projected profit in business by subtracting your total expenses from your estimated revenue. Analyze your profit margins to ensure they align with your financial goals.

If they fall short, consider increasing prices, finding ways to reduce expenses, or focusing on higher-margin products or services.

Creating A Cash Flow Forecast

Develop a month-by-month cash flow forecast to ensure you’ll have sufficient funds to cover expenses throughout the year. This helps you identify potential cash shortages, plan for large expenses or investments, and make informed decisions about timing of purchases or hiring.

Setting Aside Contingency Funds

Allocate a portion of your budget for unexpected expenses or opportunities. A good rule of thumb is to set aside 10-20% of your revenue as a contingency fund .

Finalizing And Implementing Your Budget

Review your completed budget to ensure it’s realistic and aligns with your business goals. Once finalized, share the budget with relevant team members, set up a system for tracking actual performance against your budget, and schedule regular review sessions to monitor progress and make adjustments.

Regular Review And Adjustment

Your budget is a living document that requires ongoing attention. Plan to review it monthly and make adjustments based on actual performance vs. projections, changes in the market or your business model, and unexpected challenges or opportunities.

By following this detailed process, you’ll create a detailed business budget that serves as a helpful tool for decision-making and growth. Regular monitoring and adjustment will ensure your budget remains effective throughout the year.

Choosing The Right Budgeting Method

Selecting an appropriate budgeting method is crucial for effectively managing your business finances. Different approaches suit various business types and goals, so it’s important to explore popular budgeting methods to find the best fit for your needs.

Traditional Budgeting

Traditional budgeting involves creating a detailed budget based on historical data and future projections . This method is suitable for businesses with relatively stable operations and predictable expenses.

Pros: 

• Offers a detailed financial overview
• Helps identify cost-saving opportunities
• Facilitates long-term planning
• Can be time-consuming to create and maintain
• May become outdated quickly in rapidly changing markets

Zero-Based Budgeting

Zero-based budgeting starts from scratch each budgeting period, requiring justification for every expense . This approach is ideal for businesses looking to optimize spending and eliminate unnecessary costs .

• Encourages critical evaluation of all expenses
• Helps identify and eliminate inefficiencies
• Adapts well to changing business environments
• Requires significant time and effort
• May be challenging for businesses with complex operations

Rolling Budget

A rolling budget involves continuously updating your financial plan, typically on a monthly or quarterly basis . This approach is well-suited for businesses operating in rapidly evolving markets .

• Provides up-to-date financial projections
• Allows for quick adjustments to changing conditions
• Improves accuracy of short-term forecasts
• Requires frequent attention and updates
• May make long-term planning more challenging

Incremental Budgeting

Incremental budgeting uses the previous period’s budget as a starting point, making small adjustments for the upcoming period. This approach is suitable for stable businesses with minimal year-to-year changes .

• Simple and quick to implement
• Provides consistency in budgeting
• Requires less time and resources
• May perpetuate inefficiencies
• Doesn’t encourage critical evaluation of expenses

Activity-Based Budgeting

Activity-based budgeting focuses on the relationship between activities and costs , allocating resources based on specific cost drivers . This method is beneficial for businesses looking to optimize processes and improve efficiency .

• Provides detailed insights into cost drivers
• Helps identify areas for process improvement
• Supports more accurate cost allocation
• Can be complex to implement
• Requires detailed activity tracking

Flexible Budgeting

Flexible budgeting creates multiple budget scenarios based on different levels of activity or revenue . This approach is useful for businesses with fluctuating demand or uncertain market conditions .

• Adapts to varying levels of business activity
• Helps prepare for different scenarios
• Improves decision-making in uncertain environments
• Requires more time to create multiple scenarios
• May be challenging to choose the most appropriate scenario

Value Proposition Budgeting

Value proposition budgeting aligns your budget with your company’s value proposition and strategic goals . This method is ideal for businesses focused on long-term growth and competitive advantage .

• Ensures budget aligns with strategic objectives
• Encourages investment in key value drivers
• Supports long-term business growth
• May be challenging to quantify value in some areas
• Requires a clear understanding of your value proposition

When selecting a budgeting method, consider your business size , industry , growth stage , and strategic goals . You may find that a combination of methods works best for your unique situation.

Remember, the right budgeting approach should provide clarity , support decision-making , and help propel your business to achieve its financial objectives .

Leveraging Technology For Efficient Budgeting

Technology plays a crucial role in streamlining business operations , including budgeting . By utilizing the capabilities of contemporary tools and software, you can substantially improve your budgeting process , save time , and obtain valuable insights into your financial well-being .

Budgeting Software and Apps

Numerous budgeting applications are designed specifically for businesses of all sizes. These tools often offer features such as:

• Automated data entry and categorization
• Real-time financial reporting
• Customizable budget templates Connect your bank accounts and credit cards to our platform.
• Collaboration features for team input

Popular options include QuickBooks , Xero , and FreshBooks . These platforms can dramatically reduce the time spent on manual data entry and calculations, allowing you to focus on analysis and decision-making .

Spreadsheet Templates

For those who prefer a more hands-on approach, spreadsheet software like Microsoft Excel or Google Sheets offers powerful budgeting capabilities . Many pre-designed templates are available, which you can customize to fit your business needs.

Spreadsheets provide:

• Flexibility in budget design
• Complex calculations and formulas
• Data visualization through charts and graphs
• Easy sharing and collaboration

While spreadsheets require more manual input than dedicated budgeting software, they offer unparalleled customization options .

Expense Tracking Tools

Accurate expense tracking is fundamental to effective budgeting. Using a best business expense tracker can help you:

• Automatically categorize expenses
• Capture and store receipts digitally
• Generate expense reports
• Integrate with your accounting software

These tools not only save time but also ensure that no expenses slip through the cracks, providing a more accurate picture of your business spending.

Financial Forecasting Software

Forecasting tools use historical data and advanced algorithms to predict future financial trends . This technology can help you:

• Create more accurate budget projections
• Identify potential cash flow issues in advance
• Model different scenarios and their financial impacts
• Make data-driven decisions about investments and growth

By leveraging forecasting software, you can create more robust, forward-looking budgets that account for various potential outcomes.

Cloud-Based Solutions

Cloud technology has revolutionized business budgeting by offering:

• Real-time access to financial data from anywhere
• Automatic backups and data security
• Seamless updates and improvements
• Easy scalability as your business grows

Cloud-based budgeting solutions keep your financial data current and readily available, enabling improved teamwork and decision-making .

Integration with Other Business Systems

Modern budgeting tools often integrate with other business systems, such as:

• Customer Relationship Management (CRM) software
• Enterprise Resource Planning (ERP) systems
• Point of Sale (POS) systems
• Payroll software

These integrations provide an overview of your business finances , automatically pulling in data from various sources to create a more detailed and precise budget.

Data Visualization Tools

Transforming complex financial data into easy-to-understand visuals can greatly enhance your budgeting process. Data visualization tools offer:

• Interactive dashboards
• Customizable charts and graphs
• Real-time data updates
• Drill-down capabilities for detailed analysis

By presenting your budget data visually, you can quickly identify trends, anomalies, and areas requiring attention, making it easier to communicate financial information to stakeholders.

Embracing technology in your budgeting process can lead to significant improvements in accuracy , efficiency , and insight . As you explore these tools, consider your business’s specific needs, the level of technical expertise required, and how each solution integrates with your existing systems.

With the right technological support, you can transform your budgeting process from a time-consuming task into a powerful tool for driving business success. Remember to regularly evaluate and update your chosen tools to ensure they continue to meet your evolving business needs.

Tailoring Budgets For Different Business Types

Creating an effective budget requires a customized approach for various business models. Different business types have unique financial structures, challenges, and goals that require customized budgeting strategies .

Service-Based Businesses

Service-based businesses, such as consulting firms or marketing agencies, have distinct budgeting needs compared to product-based companies. Key considerations include labor costs , project-based budgeting , fluctuating income , and limited inventory costs .

• Labor costs : Typically the largest expense, requiring careful tracking of billable hours
• Project-based budgeting : Allocating resources for specific client projects
• Fluctuating income : Planning for inconsistent revenue streams
• Limited inventory costs : Focus on operational expenses rather than stock management

Maintaining a healthy cash flow and accurately forecasting project costs and revenues are crucial for these businesses.

Retail Businesses

Retail businesses face unique budgeting challenges due to inventory management and seasonal fluctuations. Important factors to consider include:

• Inventory costs : Balancing stock levels with demand forecasts
• Seasonal variations : Budgeting for peak and off-peak periods
• Marketing expenses : Allocating funds for promotions and advertising
• Point of sale systems : Integrating sales data into the budgeting process

Retail budgets should be flexible enough to adapt to changing consumer trends and market conditions.

Manufacturing Businesses

Manufacturing businesses often deal with complex supply chains and production processes . Their budgets should account for:

• Raw material costs : Tracking price fluctuations and supplier agreements
• Equipment maintenance and upgrades : Planning for capital expenditures
• Production efficiency : Budgeting for process improvements and waste reduction
• Inventory management : Balancing raw materials, work-in-progress, and finished goods

Accurate cost allocation and production forecasting are essential for manufacturing budgets.

Startups and Growth-Stage Companies

Startups and quickly expanding companies encounter distinctive budgeting challenges due to their ever-changing environment. Key considerations include:

• Burn rate : Carefully monitoring cash outflow relative to available funds
• Funding rounds : Budgeting for different scenarios based on potential investments
• Scaling costs : Planning for rapid expansion of teams and resources
• Research and development : Allocating funds for product development and innovation

Flexibility and scenario planning are crucial for these businesses to adapt to changing circumstances and growth trajectories.

Nonprofit Organizations

Nonprofit organizations have distinct budgeting needs due to their mission-driven nature and reliance on donations. Important factors include:

• Grant management : Tracking restricted and unrestricted funds
• Fundraising expenses : Budgeting for donor acquisition and retention activities
• Program costs : Allocating resources to achieve mission objectives
• Transparency : Creating budgets that clearly demonstrate financial stewardship

Nonprofit budgets should align closely with the organization’s mission and demonstrate efficient use of resources to stakeholders.

Seasonal Businesses

Businesses with significant seasonal variations, such as tourism or landscaping companies, require specialized budgeting approaches . Consider the following factors:

• Cash flow management : Planning for lean periods during off-seasons
• Workforce fluctuations : Budgeting for seasonal hiring and layoffs
• Equipment utilization : Accounting for periods of high and low asset usage
• Marketing timing : Allocating promotional budgets to coincide with peak seasons

These businesses should create annual budgets that account for cyclical patterns while maintaining financial stability throughout the year.

Freelancers and Solopreneurs

Individual business owners face unique challenges in budgeting due to personal and professional financial overlap. Key considerations include:

• Income variability : Planning for inconsistent revenue streams
• Self-employment taxes : Budgeting for quarterly tax payments
• Business vs. personal expenses : Clearly delineating between the two
• Retirement and benefits : Allocating funds for personal financial security

Freelancers and solopreneurs should create budgets that balance business growth with personal financial stability .

By tailoring your budgeting approach to your specific business type, you can create a financial plan that addresses your unique challenges and opportunities . While the fundamental principles of budgeting remain consistent, the emphasis and detail may vary significantly based on your business model.

Regularly review and adjust your budget to ensure it continues to serve your business’s evolving needs and helps drive your success in your particular industry or niche.

Implementing And Maintaining Your Budget

Creating a budget is only the first step; the real challenge lies in implementing and maintaining it effectively. Let’s explore the process of putting your budget into action and ensuring its long-term success.

Rolling Out Your Budget

Implementing your budget requires careful planning and communication . Consider the following steps:

• Set a start date : Choose a specific date to begin following your new budget.
• Communicate with stakeholders : Inform all relevant parties about the new budget and their roles.
• Train staff : Ensure everyone understands how to use the budget and track expenses.
• Integrate with accounting systems : Set up your budget in your accounting software for easy tracking.

Tracking Expenses and Income

Accurate tracking is crucial for budget success. Consider these strategies:

• Use accounting software : Tools like QuickBooks can automate much of the tracking process.
• Categorize transactions : Consistently assign expenses and income to the correct budget categories.
• Reconcile accounts regularly : Match your records with bank statements to catch any discrepancies.
• Monitor cash flow : Keep a close eye on the timing of income and expenses to maintain liquidity.

Regular Budget Reviews

Periodic reviews help keep your budget on track. Consider implementing the following review schedule:

• Weekly check-ins : Quickly review income and expenses to catch any immediate issues.
• Monthly analysis : Compare actual figures to budgeted amounts and investigate variances.
• Quarterly assessments : Evaluate overall budget performance and make necessary adjustments.
• Annual review : Perform an in-depth assessment to inform the next year’s budget.

Making Adjustments

Flexibility is key to maintaining an effective budget. Consider these adjustment strategies:

• Respond to variances : Investigate and address significant differences between actual and budgeted figures.
• Adapt to changes : Modify your budget as your business evolves or market conditions shift.
• Reallocate funds : Move money between categories as needed, while staying within overall limits.
• Update forecasts : Regularly revise your projections based on actual performance and new information.

Using Budget Reports

Effective reporting helps you gain insights from your budget. Implement these reporting practices:

• Generate regular reports : Create standard reports on income, expenses, and cash flow.
• Visualize data : Use charts and graphs to make budget information more accessible.
• Share with stakeholders : Distribute relevant reports to team members, investors, or board members.
• Act on insights : Use the information from reports to make informed business decisions.

Addressing Budget Challenges

Be prepared to tackle common budgeting hurdles. Consider these strategies:

• Unexpected expenses : Maintain an emergency fund to cover unforeseen costs.
• Revenue shortfalls : Have contingency plans for periods when income doesn’t meet projections.
• Overspending : Implement approval processes for expenses exceeding budget limits.
• Seasonal fluctuations : Adjust your budget to account for predictable ups and downs in your business cycle.

Leveraging Technology

Take advantage of tools to streamline budget management. Consider these technological solutions:

• Budgeting software : Use specialized tools for creating and tracking budgets.
• Cloud-based solutions : Access your budget information from anywhere, anytime.
• Automation : Set up automatic categorization of transactions to save time.
• Connect your budgeting tools with other business systems to enable smooth data exchange.

Continuous Improvement

View budgeting as an ongoing process of refinement. Implement these improvement strategies:

• Learn from past performance : Use historical data to improve future budgets.
• Stay informed : Keep up with industry trends and economic factors that may impact your budget.
• Seek feedback : Ask team members for input on how to improve the budgeting process.
• Benchmark : Compare your financial performance against industry standards to identify areas for improvement.

Implementing and maintaining your budget requires dedication and consistency . By following these strategies, you’ll be well-equipped to transform your budget into a powerful tool that propels your business forward.

Remember, a well-maintained budget is not just about controlling costs—it’s about making informed decisions that lead to sustainable growth and success .

Common Pitfalls In Business Budgeting

Creating and maintaining a budget can be challenging for business owners. By understanding common pitfalls, you can take proactive steps to avoid them and ensure your budget remains an effective financial management tool .

Underestimating Expenses

Accurately estimating costs is crucial for effective budgeting. Consider the following strategies to avoid underestimating expenses:

• Research thoroughly : Gather accurate cost information for all expenses.
• Include hidden costs : Account for often-overlooked expenses like maintenance, taxes, and fees.
• Plan for price increases : Factor in potential inflation and supplier price hikes.
• Add a buffer : Include a contingency fund for unexpected expenses.

Overestimating Revenue

While optimism is valuable in business, it’s important to remain realistic when projecting revenue . Consider these approaches:

• Use historical data : Base projections on past performance rather than best-case scenarios.
• Consider market conditions : Factor in economic trends and industry changes.
• Account for seasonality : Adjust revenue expectations for predictable fluctuations.
• Be conservative : It’s better to exceed modest projections than fall short of ambitious ones.

Neglecting Cash Flow

Effective cash flow management is crucial for business success, even for profitable companies. Keep these points in mind:

• Track timing of payments : Consider when you’ll actually receive money, not just when it’s earned.
• Monitor accounts receivable : Implement strategies to ensure timely customer payments.
• Plan for gaps : Prepare for periods when expenses may exceed income.
• Maintain a cash reserve : Keep a buffer to cover operations during lean times.

Ignoring Fixed Costs

Fixed costs can easily be overlooked, leading to budget inaccuracies. Consider these strategies:

• List all fixed expenses : Include rent, salaries, insurance, and loan payments.
• Review regularly : Some fixed costs may change over time.
• Consider long-term commitments : Factor in multi-year contracts and leases.
• Don’t forget depreciation : Account for the declining value of assets.

Failing to Adjust the Budget

A static budget quickly becomes obsolete. Keep your budget relevant by:

• Scheduling regular reviews : Set aside time to assess and update your budget.
• Responding to changes : Adjust your budget when business circumstances shift.
• Learning from variances : Use differences between actual and budgeted figures to improve future planning.
• Staying flexible : Be prepared to reallocate resources as needed.

Lack of Detail

A vague budget is difficult to implement and track. Enhance your budget’s effectiveness by:

• Breaking down categories : Use specific line items instead of broad categories.
• Setting clear targets : Define measurable goals for income and expenses.
• Including non-financial metrics : Track key performance indicators that impact your budget.
• Documenting assumptions : Record the reasoning behind your budget figures for future reference.

Not Involving Key Stakeholders

Creating a budget in isolation can lead to unrealistic expectations. Improve your budgeting process by:

• Seeking input : Consult department heads and team leaders for their insights.
• Communicating the process : Ensure everyone understands how the budget is created and used.
• Getting buy-in : Involve key personnel in setting goals and allocating resources.
• Sharing results : Keep stakeholders informed about budget performance.

Overlooking Long-Term Goals

Focusing solely on immediate needs can hinder future growth. Balance your budget by:

• Aligning with strategy : Ensure your budget supports your long-term business objectives.
• Planning for investments : Allocate funds for future expansion or improvements.
• Considering market trends : Budget for adapting to changing industry conditions.
• Balancing short-term and long-term : Find the right mix of current operations and future planning.

Relying Too Heavily on Tools

While budgeting software is helpful, it shouldn’t replace critical thinking. Enhance your approach by:

• Understanding the numbers : Don’t blindly trust automated calculations.
• Customizing templates : Adapt generic tools to fit your specific business needs.
• Using human insight : Combine data analysis with industry knowledge and experience.
• Regularly reviewing outputs : Check that automated reports align with your business reality.

Ignoring Non-Financial Factors

A detailed budget considers more than just numbers. Strengthen your budget by:

• Factoring in industry changes : Consider how market shifts might impact your finances.
• Accounting for regulations : Budget for compliance with new laws or standards.
• Considering human factors : Think about how staffing changes or training needs might affect your budget.
• Planning for technology : Budget for necessary upgrades or new systems.

By avoiding these common pitfalls, you can create a more accurate, flexible, and effective business budget. Remember that budgeting is an ongoing process of learning and refinement, and each challenge you overcome will strengthen your financial management skills and contribute to your business’s long-term success.

Using Your Budget As A Strategic Tool

A well-crafted business budget is more than just a financial roadmap; it’s a powerful strategic tool that can guide your business to success. By using your budget effectively, you can make informed decisions , identify opportunities for growth , and address challenges with confidence .

Forecasting and Planning

Your budget serves as a crystal ball for your business’s financial future. Use it to project growth , estimate future revenue and expenses , and analyze historical data to predict seasonal fluctuations or market shifts.

• Set realistic goals based on your financial projections
• Prepare for best-case and worst-case scenarios

Resource Allocation

Strategically distribute your resources to maximize efficiency and impact. Prioritize investments by allocating funds to areas that offer the highest return on investment .

• Balance short-term and long-term needs
• Use your budget to determine when to hire, outsource, or restructure
• Manage inventory levels to meet demand without tying up excess capital

Performance Measurement

Your budget provides benchmarks to evaluate your business’s financial health. Track key performance indicators (KPIs) such as gross profit margin, net profit, and cash flow .

• Compare actual vs. budgeted figures regularly Investigate discrepancies to understand their causes and effects.
• Recognize when you meet or exceed budget targets to boost morale

Decision Making

Let your budget guide critical business choices . Use financial projections to assess potential new ventures or expansions.

• Determine optimal price points based on cost structures and profit margins
• Identify areas where expenses can be reduced without compromising quality
• Assess the financial impact of major purchases or upgrades

Risk Management

Your budget helps you anticipate and mitigate potential financial risks . Pinpoint areas where your business may be financially exposed.

• Build reserves by allocating funds for emergencies or unexpected downturns
• Use your budget to plan for multiple revenue sources
• Model how different economic conditions might affect your finances

Communication Tool

Use your budget to align your team and stakeholders . Clearly communicate financial goals and constraints to all departments.

• Encourage cross-functional planning and resource sharing
• Support strategic choices with solid financial data
• Regularly update stakeholders on financial performance and projections

Your budget is a living document that evolves with your business. Use discrepancies between actual and budgeted figures to refine future projections .

• Regularly review and adjust your budget to reflect new market conditions or business strategies
• Incorporate insights from team members and financial advisors
• Compare your financial metrics to industry standards to identify areas for improvement

Growth Planning

Use your budget to support sustainable expansion . Use financial analysis to spot potential areas for business development.

• Budget for the resources needed to support expansion
• Determine when and how much additional funding might be required
• Establish financial targets that signal readiness for next growth stages

Tax Planning

Use your budget to optimize your tax strategy . Estimate future tax obligations based on projected income.

• Allocate funds for tax-deductible expenses strategically Evaluate the tax effects of major investments.
• Anticipate how potential tax law changes might affect your business

Stakeholder Management

Your budget can help manage relationships with investors, lenders, and partners. Demonstrate financial acumen through well-prepared budgets and accurate projections.

• Use your budget to support loan applications or investor pitches Use financial data to discuss favorable terms with suppliers or partners
• Create clear, informative financial reports that instill confidence in your management

By viewing your budget as a strategic tool, you transform it from a mere financial document into a powerful instrument for driving business success . It serves as your guide, helping you make informed decisions , seize opportunities , and drive your company’s growth and profitability in a sustainable manner .

Frequently Asked Questions

• How often should I review and update my business budget?

Reviewing your business budget monthly and updating it quarterly is a good practice. Monthly reviews help track actual performance against projections, while quarterly updates allow for adjustments based on market changes or shifts in business strategy .

• What’s the difference between a business budget and a financial forecast?

A business budget is a detailed plan of expected income and expenses for a specific period, typically a year, broken down into monthly or quarterly segments. 

A financial forecast , however, is a projection of future financial performance based on historical data , market trends , and economic factors , often covering a longer time frame and helping with long-term planning and strategic decision-making .

• Can I create an effective business budget without professional help?

Creating an effective business budget without professional help is possible, especially if you have a good understanding of your business finances and basic accounting principles . 

However, for complex businesses or if you’re unsure about financial matters, consulting with a professional accountant or financial advisor can provide valuable insights and ensure accuracy in your budgeting process.

• How do I handle unexpected expenses in my business budget?

Include a contingency fund in your budget, typically 5-10% of your total expenses, to handle unexpected costs without derailing your entire budget. Regularly review and categorize unexpected expenses to identify patterns and potentially include them in future budgets.

• What are some key performance indicators (KPIs) I should track alongside my budget?

Key performance indicators (KPIs) to track alongside your budget include:

• Gross Profit Margin
• Net Profit Margin
• Accounts Receivable Turnover
• Inventory Turnover
• Debt-to-Equity Ratio
• Operating Expense Ratio
• Revenue Growth Rate
• Customer Acquisition Cost
• Customer Lifetime Value

These key performance indicators offer a detailed understanding of your financial health and performance, complementing your budget and supporting your business decision-making .

Creating a business budget is a crucial step for achieving financial stability and growth . By examining your revenue , deducting fixed and variable costs , estimating profit , and tracking cash flow , you can create a detailed financial plan for your business.

Remember that budgeting is not a one-time task but an ongoing process that requires regular review and adjustment. As you implement your budget, make use of available tools and templates to streamline the process.

Set clear spending goals and consistently track your performance against these targets. This proactive approach will help you identify areas for improvement and make informed decisions about resource allocation .

Embrace budgeting as a versatile tool that adapts to the needs of your business. Regular reviews and updates ensure that your budget remains relevant and effective in the face of changing market conditions and business needs.

By adopting a flexible yet disciplined approach to budgeting, you’ll be better positioned to address financial challenges and capitalize on growth prospects . A well-crafted and regularly maintained budget is more than just a financial document—it’s a powerful instrument for achieving your business goals and driving long-term success.

Start implementing these budgeting practices today, and watch as your business flourishes with improved financial clarity and control . Your dedication to sound financial management will undoubtedly pay dividends in the future of your enterprise.

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Budgeting Process – Meaning, Approaches, and Steps

• What is a Budget and Budgeting Process?

A budget is a tool for planning, implementing, and controlling activities for the optimum utilization of scarce resources in a business. It explains the company’s objectives and the course of action it will choose to achieve its goals in detail. Also, it mentions the controls to be put in place for achieving its successful implementation. The budgeting process is the process of putting a budget in place. This process involves planning and forecasting, implementing, monitoring and controlling, and finally, evaluating the performance of the budget.

Read more on What is a Budget?

Top-down Approach

Bottom-up approach, preparing the base for the budget according to funding, creating a cost buffer, preparation of revenue and expenditure budgets, incorporating departmental budgets, incorporating bonuses, provision for capital expenditure, changes in the budget model and review, approval and implementation, budgetary controls, importance of budgets, what are the approaches to the budgeting process.

There are two main approaches to the budgeting process. These are:

This budgeting process involves preparing the budget by the company’s senior management based on the company’s objectives. The departmental managers are assigned the responsibility for its successful implementation. Every department can opt to create its own budget based on the company’s broader budget allocation and goals.

The top-down approach’s advantage is that the lower management saves a lot of time and gets a ready-made budget to be followed. They hardly participate in the preparation of the central budget. The senior managers’ experience, coupled with past-performance figures, comes in handy in such budgeting processes.

This budgeting process starts at the departmental level and moves up to higher levels. Every department within the company is required to prepare plans for its proposed activities for the next budget period and estimate the costs it will incur. These individual budgets are combined to create a bigger all-inclusive budget.

Also Read: Budgeting Cycle – Meaning, Importance, Phases and More

The budgeting process with this approach can be lengthy and time-consuming. However, employees and managers are more motivated to achieve the budget goals since they have prepared it. They have complete knowledge of what the budget actually expects them to do and how to achieve that. Such budgets tend to be more accurate and closer to the actual situation on the ground.

What are the Steps in the Budgeting Process?

The first step in preparing a budget is to identify the budget goals and how they will be achieved. Factors such as the business’s socioeconomic surroundings, sales trends, etc., have to be taken into consideration for setting goals. Also, these goals have to be set according to the economic resources available to the company. A budget will be of no use without proper funding.

The next step in a budget is to scrutinize the cost for the business. Also, evaluating factors that can affect input costs during the budget period has to be done. Revision of the compensation plans of the employees takes place every year in most companies. To make the budget realistic and achievable, proper provisions should be created for variations in these costs and compensation plans.

The next important step is to prepare different types of subsidiary budgets for the organization. Proper and realistic forecasts for the different types of budgets, such as sales, production, cash, purchase, labor and overheads, selling, and general and administrative expenses, have to be made. A realistic plan for the sources of revenue is the need for the budget period. Planning of expenditure should be done accordingly as the company cannot spend more than what it earns. Thus, the revenue target decides and dictates the expected quantum of expenses to achieve these revenue targets.

Also Read: Why is Budgeting Important?

Smaller departments prepare their own budget in many companies. In such cases, their collection and integration, along with the master budget, is a prerequisite.

Most companies have a policy of declaring bonuses for their employees at the end of the financial year as per their financial results. Many may declare mid-year bonuses in case of exceptional performances. Such expenses can become significant in the case of big companies. Hence, due provisions have to be made in the budget for such unplanned giveaways.

A company may plan to incur a capital expenditure or invest in a fixed asset during the budget period. These expenses are quite heavy and considerable by nature. Hence, after consultation with the top management, their inclusion should be done in the budget.

After finalizing all the above steps, a review of the assumptions as per the budget model should be done. Also, a thorough review of the entire budget is essential. If there is a need for any changes in the budget, it can be done now.

The budget will then go to the top management for approval. They will check if it is proper. Makers will make any changes as per need. In case everything is fine with the budget, they will give the go-ahead for implementation.

The implementation of the budget is not the last step in the budgetary process. The setting of proper budgetary controls comes next. This is necessary for the comparison of the actual performance with the provisions and estimates of the budget. Continuous reporting of variances has to be done. The management can take corrective actions accordingly.

• A budget helps in identifying the key areas and taking corrective measures to improve our efficiency.
• It provides figures that help us in analyzing the variances in the income and expenditure of a particular field.
• It helps us in setting targets and provides a base for making decisions.

For more detail, refer Why is Budgeting important?

Also, read Budgeting Cycle for more.

RELATED POSTS

• Why are Budgets Useful in Planning Process?
• Top-down Budgeting – Process, Advantages And Disadvantages
• Limitations of Budgeting
• Budget Control
• Financial Budget
• Operating Budget

Sanjay Bulaki Borad

MBA-Finance, CMA, CS, Insolvency Professional, B'Com

Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

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Creating a Budgeting Process: Step-by-Step

The budgeting process is an essential business function that’s bound to make even the most organized managers stress. What could be more important to the daily operations of the company than its cash flow? Messing up in this field could result in disrupted projects or, at worst, insolvency. 

And yet, studies have shown that  about half of organizations  don’t even have a formally documented budgeting process.

If your organization is taking on some new projects and you need to make sure that the funding stays sufficient, then studying up on the budgeting process is the best next step to take. Find out how to not only keep track of expenses and revenue but also gain more value out of your purchases and procurement process.

What Is a Budgeting Process?

The process of reviewing past budgets and planning budgets to forecast revenue is known as the budgeting process. It includes aligning with upper management in order to analyze budget data and establish goals for the future to better  control spending .

When deciding on a budget, a business allocates resources to certain company projects and objectives. Controls are put in place to enforce budgeting policies and prevent overspending. We can generally look at three different types of budgets:

• Operating  budgets involve both the revenue generated and the expenditures made during daily operations. Employee salaries and benefits are included in this category.
• Capital  expenditure involves major purchases like physical properties and equipment. Budget managers consider this category by setting priorities and making decisions to control risks.
• Cash flow  is another form of budgeting that looks at the relationship between income and expenses. Specifically, it makes sure that you have enough cash on hand at any time to cover immediate expenditures.

The budgeting process covers all the steps involved in determining and setting a budget, which can include:

• Reviewing past financial quarters and using the data to forecast future expenses and revenues.
• Developing a plan to manage the budget and implementing it. Allocate resources to cover the company’s projects and departments.
• Regularly checking up on progress by monitoring budget levels throughout the quarter.
• Evaluating the performance of the budgeting process in the end and seeing what can be learned.

But we need to go beyond just definitions and look at the role of budgeting in corporate and project management.

The Primary Goals of Budgeting

In addition to the obvious benefit of controlling spending and keeping tabs on financial activities, budgeting is taken seriously because it also:

• Helps with project planning:  What happens if market conditions change and the business needs to address problems later down the line? Budgeting is the perfect way to prepare financially.
• Coordinates collaboration:  Since the budget impacts everyone, the budgeting process must involve all departments and teams working together for the wellbeing of the overall company as a whole.
• Motivates management:  Upper management teams who are aware of budgeting efforts are more likely to understand the goals and initiatives of the business. They are motivated to hold everybody accountable for a stable budget.
• Measures performance:  Budgeting forces you to look at the financial figures and determine whether or not you’re meeting your targets. If any cash flow issues arise, you will be able to know early on.

A detailed budget sets realistic goals for your projects and ensures proper resource allocation to prevent costly spending overflows.

Why the Budgeting Process Is Vital

Companies balance their budgets for the same reason individuals do. By keeping track of the timing and amounts of income and expenditures, it’s possible to set realistic goals, track deviations in planning, and enforce corrective action.

Without enough cash, a business cannot sustain itself, but the advantages of the budgeting process are a little more complex than that.

• Setting expectations:  Once a budget sets a spending target for a particular project, then the teams can work with those expectations in mind. They can set their own deadlines and allocate resources according to the company’s master budget.
• Aligning resource allocation to the goals of the business:  Think about what part of the company deserves more money this quarter. For instance, if product sales are down this month, it may be wise to allocate more of the budget to sales and marketing.
• Facilitating collaboration:  Departments should not be siloed. Budgeting is the perfect opportunity to connect the finance teams with the rest of the business. Everyone gets a chance to talk about priorities, expectations, funding, and goals, and the finance department gets to share guidance.

A company with a strong budgeting process in place is also seen as more trustworthy when it comes to third-party partnerships. For instance, if you ever need to borrow a business loan, your lender will likely want to know how well you’ve followed budgets in the past.

How Does One Approach Budget Management?

Budget management cannot be perfected overnight, and neither is it possible to achieve for one person. It requires collaboration among upper management, the finance department, and the various budget and project managers across the company.

A budget can be developed in a  top-down  approach, where upper management begins the process by looking at business objectives and current resources to prepare a budget plan. It then passes down the responsibility of enforcing this plan to the department managers, who themselves can set their own guidelines based on the overall budget allocation.

Top-down works out in most cases because lower management can save time and effectively hit the ground running since most of the work has been done externally.

Alternatively, budgeting can occur from the  bottom-up , essentially an inverse of top-down. Planning begins at the departmental level and goes up; that is, each department prepares its own budget plans and cost estimations, and upper management combines them all into one big, inclusive budget process.

Bottom-up is more time-consuming, but it also results in a more suitable budget since the people who will conduct daily operations and actually spend the money have a larger voice in how resources will be allocated. Each department is also likely to be more motivated to achieve financial goals this way since it was the one who made the budget to begin with.

In a non-business example, New York City famously implemented its own bottom-up strategy known as  Participatory Budgeting  in the early 2010s. The plan gave control of the public budgeting process to community members.

What Steps Does the Budgeting Process Involve?

Regardless of the approach you take, the next step is to convert the budgeting process into tangible business strategy. Start by determining your budgetary goals (i.e. what you’re trying to achieve with limited resources). Then determine how you will achieve those objectives and track your progress along the way.

• Identify goals:  Depending on factors like market dynamics,sales trends, and current resources, a company has different needs regarding its budget and must plan accordingly.
• Look at past data:  Take advantage of the existing information you have from last quarter. What did you learn about your last budget that can be used this time around? Were there unanticipated shortfalls in funding? Were the assumptions you made back then still accurate? And how has the market or industry changed since then? Encourage your individual departments to ask themselves these questions.
• Get some tangible numbers out:  Getting into the actual figures, identify your income streams, investments, and expenditures. Whether we’re talking about exact numbers or estimates, look for fixed costs (overhead, static costs like rent, mortgage, utilities, salaries, and insurance), variable costs (discretionary fees like software subscriptions, travel costs, and advertising services), and irregular costs (surprise expenses that are difficult to forecast, such as special events and mergers/acquisitions).
• Always have cash flow in mind:  Don’t just look at the amounts; look at the timing as well. Is your consistent revenue enough to take care of seasonal, momentary expenditures? Look at cash flow in terms of the money going in at a certain point compared to the money going out.

And don’t forget to revisit your budgeting process regularly. It’s not a one-time consideration, as you will need to check back and update your efforts. Schedule budgetary reviews every quarter so that potential issues are caught in time.

Budgeting Process Techniques and Best Practices

Corporate budgeting is a high-risk activity that even experienced management teams need time to get right. Thankfully, it isn’t too difficult with a bit of practice and an understanding of how the process generally works.

In addition to the above steps, know that budgets will often change with time. Many businesses operate in fluctuating markets where demand goes up and down depending on the month, which are conditions that call for seasonal budgeting. Also, be honest in your estimations. Don’t over-exaggerate sales or expenditures, and be sure to include even small charges like federal and state taxes.

Know the “Why” Behind the Numbers

A budget manager clearly works with a lot of numbers, but have you ever stopped to think about the “why” beyond those numbers? What assumptions is your budget based on, and how would you interpret those numbers?

To illustrate, try to think about the key causes for high expenses the next time you calculate them out. Are you in need of additional staff, hence the increased investment into salaries? Or are your sales teams short on tools, and you need to spend more on marketing initiatives?

On the revenue side of things, remember what products and services you sold to customers that quarter. Did the sales reach your intended goals, or did they fall short and cause cash flow problems early on? Are you able to adjust product pricing accordingly to address the problem, or is there an underlying need for more robust marketing strategies?

A budget is more than just a spreadsheet. It’s a guide to how your operations should be laid out.

Grasp at Key Performance Indicators

The budgeting process is also heavily KPI-based. Think about how resource allocation should reflect the overall goals of your organization. Key performance indicators tie your efforts to those business objectives and keep you going in the right direction as the budgeting process continues.

Some examples of KPIs often used by budgeting teams are:

• Cash flow and expenses
• Employee payroll
• Accounts payable and receivable fees
• Turnover rates

Regardless of which ones you end up using, make them clear and easily measurable to get the most out of them.

Get It Written Down

Planning out the budget needs to be a formal business process, so don’t just leave it a mental roadmap. Have a budget plan written down somewhere so that you may be thorough in your enforcement controls. In fact, successful companies always publish their annual budget documents to be shared throughout the organization for this reason.

While paper or even spreadsheet programs are an option, the most efficient and organized way to go about a budget report is through accounting and  procurement software  platforms. As requirements change and budgets shift in focus, a flexible and versatile way to manage your funds is essential to staying competitive in today’s market.

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RELATED ARTICLES

The Business Planning Process: 6 Steps To Creating a New Plan

In this article, we will define and explain the basic business planning process to help your business move in the right direction.

What is Business Planning?

Business planning is the process whereby an organization’s leaders figure out the best roadmap for growth and document their plan for success.

The business planning process includes diagnosing the company’s internal strengths and weaknesses, improving its efficiency, working out how it will compete against rival firms in the future, and setting milestones for progress so they can be measured.

The process includes writing a new business plan. What is a business plan? It is a written document that provides an outline and resources needed to achieve success. Whether you are writing your plan from scratch, from a simple business plan template , or working with an experienced business plan consultant or writer, business planning for startups, small businesses, and existing companies is the same.

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The best business planning process is to use our business plan template to streamline the creation of your plan: Download Growthink’s Ultimate Business Plan Template and finish your business plan & financial model in hours.

The Better Business Planning Process

The business plan process includes 6 steps as follows:

• Do Your Research
• Calculate Your Financial Forecast
• Draft Your Plan
• Revise & Proofread
• Nail the Business Plan Presentation

We’ve provided more detail for each of these key business plan steps below.

1. Do Your Research

Conduct detailed research into the industry, target market, existing customer base,  competitors, and costs of the business begins the process. Consider each new step a new project that requires project planning and execution. You may ask yourself the following questions:

• What are your business goals?
• What is the current state of your business?
• What are the current industry trends?
• What is your competition doing?

There are a variety of resources needed, ranging from databases and articles to direct interviews with other entrepreneurs, potential customers, or industry experts. The information gathered during this process should be documented and organized carefully, including the source as there is a need to cite sources within your business plan.

You may also want to complete a SWOT Analysis for your own business to identify your strengths, weaknesses, opportunities, and potential risks as this will help you develop your strategies to highlight your competitive advantage.

2. Strategize

Now, you will use the research to determine the best strategy for your business. You may choose to develop new strategies or refine existing strategies that have demonstrated success in the industry. Pulling the best practices of the industry provides a foundation, but then you should expand on the different activities that focus on your competitive advantage.

This step of the planning process may include formulating a vision for the company’s future, which can be done by conducting intensive customer interviews and understanding their motivations for purchasing goods and services of interest. Dig deeper into decisions on an appropriate marketing plan, operational processes to execute your plan, and human resources required for the first five years of the company’s life.

3. Calculate Your Financial Forecast

All of the activities you choose for your strategy come at some cost and, hopefully, lead to some revenues. Sketch out the financial situation by looking at whether you can expect revenues to cover all costs and leave room for profit in the long run.

Begin to insert your financial assumptions and startup costs into a financial model which can produce a first-year cash flow statement for you, giving you the best sense of the cash you will need on hand to fund your early operations.

A full set of financial statements provides the details about the company’s operations and performance, including its expenses and profits by accounting period (quarterly or year-to-date). Financial statements also provide a snapshot of the company’s current financial position, including its assets and liabilities.

This is one of the most valued aspects of any business plan as it provides a straightforward summary of what a company does with its money, or how it grows from initial investment to become profitable.

4. Draft Your Plan

With financials more or less settled and a strategy decided, it is time to draft through the narrative of each component of your business plan . With the background work you have completed, the drafting itself should be a relatively painless process.

If you have trouble writing convincing prose, this is a time to seek the help of an experienced business plan writer who can put together the plan from this point.

5. Revise & Proofread

Revisit the entire plan to look for any ideas or wording that may be confusing, redundant, or irrelevant to the points you are making within the plan. You may want to work with other management team members in your business who are familiar with the company’s operations or marketing plan in order to fine-tune the plan.

Finally, proofread thoroughly for spelling, grammar, and formatting, enlisting the help of others to act as additional sets of eyes. You may begin to experience burnout from working on the plan for so long and have a need to set it aside for a bit to look at it again with fresh eyes.

6. Nail the Business Plan Presentation

The presentation of the business plan should succinctly highlight the key points outlined above and include additional material that would be helpful to potential investors such as financial information, resumes of key employees, or samples of marketing materials. It can also be beneficial to provide a report on past sales or financial performance and what the business has done to bring it back into positive territory.

Business Planning Process Conclusion

Every entrepreneur dreams of the day their business becomes wildly successful.

But what does that really mean? How do you know whether your idea is worth pursuing?

And how do you stay motivated when things are not going as planned? The answers to these questions can be found in your business plan. This document helps entrepreneurs make better decisions and avoid common pitfalls along the way. ​

Business plans are dynamic documents that can be revised and presented to different audiences throughout the course of a company’s life. For example, a business may have one plan for its initial investment proposal, another which focuses more on milestones and objectives for the first several years in existence, and yet one more which is used specifically when raising funds.

Business plans are a critical first step for any company looking to attract investors or receive grant money, as they allow a new organization to better convey its potential and business goals to those able to provide financial resources.

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Other Helpful Business Plan Articles & Templates

By Rachel Burger     March 29, 2024

10 straightforward steps to the corporate budget planning process.

Today, the corporate budget planning process is vital for Finance. Through this structured approach, organizations allocate resources, forecast financial outcomes and plan for future financial performance. Those key uses underscore why the process is so crucial to effective strategic management.

Corporate Budget Planning

In essence, corporate budget planning enables businesses to align their spending and investment with their goals, priorities and market conditions.

The process typically involves 10 key but straightforward steps.

1. Define Objectives and Strategy

Defining objectives and strategy for corporate budget planning involves setting clear, actionable goals that align with the organization's broader strategic vision. These objectives, in turn, serve as benchmarks for what the company aims to achieve financially within a specific time period. What aims? A few examples include increasing revenue by a certain percentage, reducing operational costs, expanding into new markets or enhancing capital investment returns.

At the same time, effective objectives are both ambitious and realistic. They provide a focused direction for financial planning and decision-making. Accordingly, the objectives should be developed through a collaborative process that involves input from key stakeholders across the organization. Such input ensures alignment with overall business goals and accounts for the company's operational capabilities, market conditions and competitive landscape.

The strategy for achieving these objectives is the roadmap that outlines how the organization will allocate resources to meet its financial goals. What's involved in that strategy? Key elements are detailed planning on revenue generation tactics, cost management initiatives, investment in growth opportunities and risk mitigation measures.

This strategic planning requires a deep understanding of the business environment, including customer demand, economic trends and regulatory changes. That understanding allows for making informed decisions on spending, saving and investing. But whatever the strategy, it should be flexible enough to allow for adjustments in response to unforeseen challenges or opportunities.

Ultimately, the combination of well-defined objectives and a robust strategy enables a company to efficiently execute its corporate budget planning. And that matters because it ensures financial stability and supports long-term organizational growth.

2. Review Past Performance

Reviewing past performance is an essential phase in the corporate budget planning process.

That review acts as a mirror to reflect the organization's financial health and operational efficiency over previous periods. Thus, this retrospective analysis involves a comprehensive examination of financial statements (e.g., income statements, balance sheets and cash flow statements) alongside operational metrics.

The goal? To identify patterns, trends and anomalies that can inform future budgeting decisions. By understanding where the company has had financial success and faced challenges, leadership can make more informed predictions and decisions for the future. (We believe that Finance teams using AI and Sensible ML to identify patterns, trends and anomalies are the ones getting the farthest ahead.)

Yet this review process goes beyond merely looking at numbers. Instead, it requires a deep dive into the reasons behind those numbers. If the company experienced a significant variance in actual revenues compared to budgeted revenues in a recent FP&A report , for example, knowing the why behind that variance is vital. Was it due to changing market conditions, a new competitor entering the market or perhaps internal factors such as production issues?

Similarly, analyzing expenditure trends helps identify areas of inefficiency or overspending. This analysis can involve examining costs line by line to see where the budget was exceeded and why. Through that process, companies can identify opportunities for cost savings or process improvements.

Reviewing past performance, however, is not just about identifying what went wrong. The process also helps organizations recognize what went right. Why does that matter? Well, success in certain areas – such as a particularly effective marketing campaign or a cost-saving initiative – provide valuable lessons. Those lessons can then be replicated and built upon in future periods.

This phase of the budget planning process also encourages a culture of accountability and continuous improvement within the organization. Essentially, by closely examining past performance, departments and teams can:

• Set more realistic goals
• Better align strategies with corporate objectives
• Adjust plans based on what has been proven to work or not work in the past

Ultimately, in the corporate budget planning process, reviewing past performance is a critical step. It lays the groundwork for more accurate and effective budget planning. In fact, this step ensures the budgeting process is grounded in reality – one where strategies and objectives are informed by empirical data and historical context. This grounding helps organizations not only set more achievable financial targets but also devise strategic initiatives more likely to drive the organization toward its long-term goals.

3. Revenue Forecasting

Revenue forecasting allows a company to estimate its future sales and income over a specified period. What so crucial about this projection? It helps with setting financial targets, making informed decisions about expenditures and planning for growth.

Typically, revenue forecasts are based on a combination of historical sales data, market analysis and an assessment of external factors that could influence demand. Those factors can include economic trends, industry developments and competitive dynamics. By analyzing these elements, companies aim to predict their financial inflow with a reasonable degree of accuracy. And they do it while adjusting for seasonality, market shifts and other variables that might impact revenue.

Effective revenue forecasting requires a meticulous approach – one that blends quantitative analysis with qualitative insights. Companies often use models that incorporate past performance trends while adjusting for future market expectations and strategic initiatives, such as product launches or expansions.

Whatever the model, the forecasting process is inherently iterative, with forecasts regularly updated to reflect new information or changes in the business environment. This dynamic approach allows companies to remain agile. How? It empowers companies to make strategic adjustments to operations, marketing and budget allocations in response to evolving forecasts.

Ultimately, accurate revenue forecasting is essential for strategic planning, resource allocation and financial management. Businesses can use the forecasts to set realistic goals and measure progress toward achieving them.

4. Cost and Expense Estimation

Cost and expense estimation is essential for creating a realistic and effective corporate budget plan. Why, exactly? Such estimations help businesses anticipate financial outflows and manage resources efficiently. For any cost estimation, both fixed and variable costs matter. Salaries, rent and utilities are examples of fixed costs – which, by nature, do not change with the level of goods or services produced. Meanwhile, materials, shipping and commissions are example variable costs, which inherently fluctuate with business activity levels.

The accuracy of cost and expense estimation greatly impacts the ability to maintain profitability and cash flow. To estimate costs effectively, companies analyze historical spending trends to forecast future expenses. This analysis is supplemented with information about planned initiatives, expansion efforts or any operational strategy changes that could affect costs. For variable costs, companies also consider projected sales volumes, pricing strategies, supply chain dynamics and other factors that affect the cost of goods sold and operational expenses.

In addition, effective cost and expense estimation requires a forward-looking approach that considers external factors. Market trends, economic conditions and regulatory changes are just a few of such factors. For instance, anticipated increases in raw material costs, changes in labor laws or fluctuations in currency exchange rates can all impact future expenses. Such considerations enable businesses to develop more accurate and resilient budgets.

But companies must also maintain a degree of flexibility in those budgets to accommodate unexpected costs. This accommodation, in turn, ensures companies can respond to unforeseen challenges – without compromising financial stability.

Overall, cost and expense estimations are not just about predicting numbers. This step is also about understanding the financial implications of a company's operational and strategic decisions. By carefully analyzing both internal and external factors that influence costs, businesses can create budgets that support their goals while effectively managing risk. This process requires the following:

• Collaboration across departments
• Clear communication of financial goals and constraints
• Regular review and adjustment of estimates to reflect new information or changing conditions

Ultimately, through diligent cost and expense estimation, companies lay the groundwork for financial health, strategic growth, and long-term success in corporate budget planning.

5. Capital Budgeting

Capital budgeting in corporate budget planning is a strategic process that helps companies evaluate and prioritize investments in long-term assets and projects. How? Assessments look at potential expenditures on assets (e.g., new machinery, property, technology upgrades or expansion projects), which require substantial upfront investment but generate returns over several years. Accordingly, the capital budgeting process helps determine which projects align with strategic objectives and offer the best potential for financial return.

Capital budgeting employs various analytical techniques, such as net present value (NPV), internal rate of return (IRR) and payback period calculations. Using these techniques, companies evaluate the profitability and risk of investment proposals. This meticulous evaluation, in turn, helps ensure a company allocates its limited resources to the projects most likely to enhance its competitive position and shareholder value over the long term.

Yet capital budgeting is not merely about identifying and investing in profitable ventures. It also involves strategic planning and risk management. Thus, capital budgeting requires a forward-looking perspective that considers how investments might impact the company's financial health and ability to respond to future market changes. By carefully selecting projects that contribute to strategic goals (e.g., expanding market reach, improving efficiency or innovating product offerings), companies can sustain growth and adapt to evolving industry landscapes.

Ultimately, this process demands cross-functional collaboration. That collaboration involves input from various departments to ensure projects are feasible, strategically aligned and have a clear implementation plan. Through effective capital budgeting, businesses position themselves to make informed decisions that drive long-term success and resilience.

6. Allocate Resources

Allocating resources in corporate budget planning requires distributing financial assets among various departments, projects and initiatives to achieve strategic goals and operational efficiency. Through this critical step, companies decide how much funding to allocate to different areas of the business. Based on what? The strategic importance, the expected return on investment and the alignment with the company's overall objectives.

Thus, allocating resources requires a delicate balance between supporting existing operations, investing in growth opportunities and maintaining financial health. Effective resource allocation ensures that every dollar spent contributes to the company's long-term success. Whether through driving revenue growth, enhancing productivity or entering new markets, those contributions all matter to the company's bottom line.

Effective resource allocation demands thorough analysis and strategic thinking. To get started, companies must clearly understand its priorities and objectives. A detailed evaluation of the potential impact and costs tied to each budget request is also important. Throughout the process, decision-makers must consider projected revenue, cost savings, market trends, competitive dynamics and other factors. Yet the process isn't static. It requires continuous monitoring and adjustment in response to performance data and changing market conditions.

Ultimately, companies must regularly review how resources are allocated and make data-driven adjustments. By doing so, companies can invest in the right areas to support sustainable growth and adaptability. This approach thus not only maximizes the return on investment but also strengthens the organization's ability to navigate uncertainty and capitalize on emerging opportunities.

7. Prepare Budget Drafts

Preparing budget drafts in corporate budget planning is a crucial phase. Preliminary financial plans are developed in this step, reflecting the company's strategic objectives, revenue forecasts, and resource allocation decisions. This process involves compiling detailed estimates of expected income, expenditures and investments for the upcoming period, usually the next fiscal year.

Drafting the budget requires a collaborative effort across various departments, ensuring each contributes its insights and requirements. This collaborative approach ensures the budget aligns with both the strategic goals of the company and the operational needs of individual departments. In essence, the draft budget serves as a working document – one that facilitates discussions and adjustments before being finalized.

The draft incorporates all the key components of financial planning. What are those components? They include sales forecasts, cost estimates, planned capital expenditures and any other financial commitments. By including these elements, the draft budget provides a comprehensive overview of the company's financial strategy.

The preparation of budget drafts is iterative, allowing for refinement and adjustment as more accurate or updated information becomes available. That iteration, however, requires a balance between ambition and realism to ensure the budget is challenging but achievable.

In this phase, Finance teams therefore play a pivotal role. How? They analyze data to ensure consistency across different parts of the organization and integrate strategic priorities into the financial planning process. This stage often involves scenario planning and sensitivity analysis to assess the impact of various assumptions and potential risks on the company's financial performance.

Ultimately, by carefully crafting these budget drafts, companies lay the groundwork for financial discipline, strategic alignment and operational efficiency. The draft budget is therefore a critical tool for guiding decision-making, setting expectations, and providing a baseline against which actual performance can be measured and managed throughout the fiscal year.

8. Review and Approve

In this phase, the draft budget developed through collaborative efforts across departments undergoes scrutiny by senior management and, often, the board of directors. This step ensures the proposed budget aligns with the strategic goals of the organization, remains financially sound, and sets realistic revenue and expenditure targets.

The review process involves a thorough examination of three aspects:

• Assumptions made during the drafting phase
• Validation of the financial forecasts
• Assessment of the proposed resource allocations

Through those aspects, the process offers an opportunity for key decision-makers to challenge and refine the budget. Doing so ensures it supports strategic initiatives, addresses operational needs and effectively manages financial risks.

Notably, this phase may involve several rounds of review and adjustment, with feedback provided to department heads and Finance teams. Why? To further refine the budget until it meets the organization's strategic and financial objectives. After satisfying the scrutiny of the review phase, the budget moves to the approval stage. This formal endorsement, usually by the company's top executives and the board of directors, signifies the budget is the official financial plan for the upcoming period.

In other words, the approval process solidifies the organization's commitment to the budget's targets and allocations, setting the stage for implementation. The approval also serves as a signal to the entire organization about the priorities and financial direction for the forthcoming period. With that signal, the approval emphasizes accountability and the importance of adhering to the budget.

Ultimately, the approved budget becomes the benchmark against which financial performance is measured, guiding decision-making and financial management throughout the fiscal year. This process of review and approval is crucial for ensuring the budget reflects the collective wisdom and strategic intent of the organization's leadership. Thus, the process effectively balances ambition with realism and aligns resources with opportunities.

9. Implement the Budget

Implementing the budget in corporate budget planning marks the transition from planning to action. In essence, the approved budget serves as a roadmap for the organization's financial activities over the upcoming period. This phase involves disseminating the budget details across departments, ensuring that managers and team leaders understand their financial targets and resource allocations.

Implementation requires the following:

• Setting up systems for monitoring expenditures and revenues
• Establishing accountability mechanisms
• Integrating the budget into daily operations and decision-making processes

Effectively taking those actions during implementation ensures all parts of the organization work toward the common financial goals set out in the budget. And everyone does it with a clear understanding of their roles in achieving the targets.

Ultimately, implementing the budget is a continuous process that involves not just following the budget but also adapting to changes. Successful adaptation requires ongoing communication and coordination across the organization to maintain alignment with the overall financial strategy.

10. Monitor and Review

Monitoring and reviewing in corporate budget planning are an ongoing process that involves continuously tracking financial performance against the approved budget throughout the fiscal year. Through this critical step, companies can ensure any deviations from the budget – whether in revenues, expenditures or other financial metrics – are quickly identified. Doing so allows for timely adjustments to stay on track. Collectively, the monitor and review process encompass the following:

• Regular reporting on financial performance
• Analysis of variances
• Assessment of the budget's effectiveness in supporting the organization's strategic objectives

Ultimately, the review component allows for reflection on what is driving any discrepancies between actual and budgeted figures. Such reflection leads to insights that inform future budgeting cycles or immediate corrective actions. Through the cyclical process of monitoring and review, companies can foster a culture of financial discipline, promotes accountability across departments. That process thus enhances the organization's ability to adapt to changing circumstances, thereby ensuring financial stability and strategic alignment.

What's Next for Corporate Budget Planning?

Don't forget to reflect on what you learn through every corporate budget planning cycle. Insights gained from monitoring, reporting and adjusting the budget can feed into the next round. In doing so, insights will help your company refine its planning approach and improve accuracy and effectiveness over time.

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How to Prepare a Budget for an Organization: 4 Steps

• 16 Nov 2021

An organization’s budget dictates how it leverages capital to work toward goals. For this reason, the ability to prepare a budget is one of the most crucial skills for any business leader —whether a current or aspiring entrepreneur, executive, functional lead, or manager.

Before preparing your first organizational budget, it’s important to understand what goes into a budget and the key steps involved in creating one.

What Is a Budget?

A budget is a document businesses use to track income and expenses in a detailed enough way to make operational decisions.

Budgets are typically forward-looking in nature. Income is based on projections and estimates for the periods they cover, as are expenses. For this reason, organizations often create both short- (monthly or quarterly) and long-term (annual) budgets, where the short-term budget is regularly adjusted to ensure the long-term budget stays on track.

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Most organizations also prepare what’s known as an “actual budget” or “actual report” to compare estimates against reality following the period covered by the budget. This allows an organization to understand where it went wrong in the budgeting process and adjust estimates moving forward.

Budget vs. Cash Flow Statement

If the definition above sounds similar to a cash flow statement , you’re right: Your organization’s budget and cash flow statement are similar in that they both monitor the flow of money into and out of your business. Yet, they differ in key ways.

First, a budget typically offers more granular details about how money is spent than a cash flow statement does. This provides greater context for making tactical business decisions, such as considering where to trim business expenses.

Related: The Beginner’s Guide to Reading & Understanding Financial Statements

Second, a budget is, quite literally, a tool used to direct work done within an organization. The cash flow statement plays a different role by offering a higher-level overview of how money moves into, throughout, and out of an organization.

Instead of thinking of the two documents as competing, view them as complementary, with each playing a role in driving your business’s performance.

Steps to Prepare a Budget for Your Organization

The steps below can be followed whether creating a budget for a project, initiative, department, or entire organization.

1. Understand Your Organization’s Goals

Before you compile your budget, it’s important to have a firm understanding of the goals your organization is working toward in the period covered by it. By understanding those goals, you can prepare a budget that aligns with and facilitates them.

Related: The Advantages of Data-Driven Decision-Making

For example, consider a business that regularly experiences year-over-year revenue growth that’s offset by rising expenses. That organization might benefit from focusing efforts on better controlling expenses during the budgeting process.

Alternatively, consider a company launching a new product or service. The company may invest more heavily in the fledgling business line to grow it. With this goal, the company may need to trim expenses or growth initiatives elsewhere in its budget.

2. Estimate Your Income for the Period Covered by the Budget

To allocate funds for business expenses, you first need to determine your income and cash flow for the period to the best of your ability.

Depending on the nature of your organization, this can be a simple or complicated process. For example, a business that sells products or services to known clients locked in with contracts will likely have an easier time estimating income than a business that depends on active sales activity. In the second case, it would be important to reference historical sales and marketing data to understand whether the market is changing in a way that might cause you to miss or exceed historical trends.

Related: How to Read & Understand an Income Statement

Beyond income from sales activity, you should include other income sources, such as returns on investments, asset sales, and bond or share offerings.

3. Identify Your Expenses

Once you understand your projected income for the period, you need to estimate your expenses. This process involves three main categories: fixed costs, variable expenses, and one-time expenses.

Fixed costs are any expenses that remain constant over time and don’t dramatically vary from week to week or month to month. In many cases, those expenses are locked in by some form of contract, making it easy to anticipate and account for them. This category usually includes expenses related to overhead, such as rent payments and utilities. Phone, data, and software subscriptions can also fall into this category, along with debt payments. Any expense that’s regular and expected should be included.

Related: 6 Budgeting Tips for Managers

Variable expenses are those your business incurs, which vary over time depending on several factors, including sales activities. Your shipping and distribution costs, for example, are likely to be higher during a period when you sell more product than one when you sell less product. Likewise, utilities such as water, gas, and electricity will be higher during periods of increased use. This is especially true for businesses that manufacture their own products. Sales commissions, materials costs, and labor costs are other examples of variable expenses.

Both fixed expenses and variable expenses are recurring in nature, making it easy to account for them (even if variable expenses must be projected). One-time expenses , also called “one-time spends,” don’t recur and happen more rarely. Purchasing equipment or facilities, developing a new product or service, hiring a consultant, and handling a security breach are all examples of one-time expenses. Understanding major initiatives—and what it will take to accomplish them—and what you’ve spent in previous years on similar expenses can help account for them in your budget, even if you’re unsure of their exact values.

4. Determine Your Budget Surplus or Deficit

After you’ve accounted for all your income and expenses, you can apply them to your budget. This is where you determine whether you have enough projected income to cover all your expenses.

If you have more than enough income to cover your expenses, you have a budget surplus. Knowing this, you should determine how to use additional funds best. You may, for example, move the money into a rainy day fund you can access should your actual income fall short of projections. Alternatively, you may deploy the funds to grow your business.

On the other hand, if your expenses exceed your income, you have a budget deficit. At this point, you must identify the best path forward to close the gap. Can you bring in additional funds by selling more aggressively? Can you lower your fixed or variable expenses? Would you consider selling bonds or shares of company stock to infuse the business with additional capital?

An Important Financial Statement

The person responsible for generating a budget varies depending on an organization’s nature and its budgetary goals. An entrepreneur or small business owner, for example, is likely to prepare an organizational budget on their own. Meanwhile, a larger organization may rely on a member of the accounting department to generate a budget for the entire business. Individual department heads or functional leads might also be called on to submit budget proposals for their teams.

With this in mind, anyone who aspires to start their own business or move into an organizational leadership position can benefit from learning how to prepare a budget.

Do you want to take your career to the next level? Consider enrolling in our eight-week Financial Accounting course or three-course Credential of Readiness (CORe) program to learn financial concepts that can enable you to unlock critical insights into business performance and potential. Not sure which course is right for you? Download our free flowchart .

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Understanding The Budgeting Process: Complete Guide

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Without a budget, a business can’t track how much of its revenue is profit . As a result, expenditures will be scattered and unclear. Without a budget, a business can’t determine its financial health. Not really. A budget gives a detailed estimate of income and expenditures over the budget period. It allows businesses to identify potential dangers and areas in need of financial improvement, cut down unwanted expenses, provide data for forecasting, and so much more. It can help fuel important business decisions, predict cash flow, and accurately predict profits. Without a proper budget, a business sets itself up for failure, making it is an essential part of any business plan. And a proper budget requires thought, time, and effort. Key Takeaways: The three types of budgets are operating budget, sales budget, and cash budget. The steps in the budgeting process are: The preparation phase The approval phase The execution phase The evaluation phase Budgets are important to companies because it can communicate objectives and evaluate departmental performance. In This Article    Skip to section What Is a Budgeting Process? The Importance of Creating and Maintaining Budgets Types of Budgets Components of a Business Budget The Most Common Approaches to the Budgeting Process The Steps of the Budgeting Process Sign Up For More Advice and Jobs Show More What Is a Budgeting Process?

In the simplest of terms, the budgeting process involves creating, approving, and implementing a budget. It is the financial planning a company undergoes to ensure that they maintain the expected profit margins.

This can sometimes be a long, drawn-out process that drags out over months. For larger companies , it can be four to six months, sometimes longer. For smaller companies, it may only be one to three months from start to finish.

Companies that have managed to streamline the budgeting process may not need nearly as long to create the budget for the upcoming fiscal year.

A budget is more than just crunching a few numbers and planning to keep expenditures below a certain threshold. It is a plan for the company’s future.

During the budgeting process, benchmarks will be set, priorities will be noted, and goals will be established . The budgeting process will give an overview of the revenue, profit, expenses, and more. All of it adds up creating a formal plan to achieve a business’s goals.

By implementing a proper budget, a company can better evaluate its performance and determine whether or not they’ve met the goals of the budget period. They help a business answer some of these questions:

Is the business performing well?

Do they have the money to continue running?

To scale their operations?

The Importance of Creating and Maintaining Budgets

A budget is more than just numbers. Creating, implementing, and evaluating the budget is an important aspect of a business’s financial health.

Budgets estimate and track income and expenses, but they also:

Help to set and highlight priorities

Communicate objectives and plans to departmental managers

Evaluate departmental performance—both at the managerial level and below

Control spending

Validate expenditures

Identify available funding and the need for additional funding

Types of Budgets

The budget a business creates during the budgeting process, the “master budget,” is a comprehensive compilation of many smaller budgets.

A master budget, often referred to as a comprehensive budget, combines all of the lower-level budgets — like the cash budget, the sales budget, cost of goods sold , and administrative budget — the cash flow forecasts , the budgeted financial statements, and the overall financial plan.

It can include everything from revenue and expenses, operating costs, sales projections, capital expenditures, and more.

The master budget will typically forecast an entire fiscal year and can be broken down into monthly or quarterly projections. The income statement , the balance sheet, and the cash flow statement can all be projected based on the master budget.

Some of the lower-level budgets that make up the master budget are:

Operating budget. The operating budget determines the income-generating activities, including both revenue and expenses, of the day-to-day operations. As the name suggests, an operating budget will focus on the operating costs.

Sales budget. The sales budget is a forecast of the total expected sales volume for the budget period. In the simplest of terms, it is the number of expected units sold multiplied by the expected selling price.

Cash budget (or cash flow budget). A cash budget estimates the actual cash flow of a company. It can help project and track the inflows and outflows of cash.

Like the other budget types, there is research and forecasting involved in creating the cash budget. Since the budgeting process involves estimating the payables and receivables, outstanding accounts can complicate the process.

These complications can make the budgeting process for this particular budget type more difficult than others. To compensate for the past-due accounts, the company will need to include an allowance for doubtful accounts.

Components of a Business Budget

Several lower-level budgets will be compiled and collected to create the comprehensive master budget. But, every master budget will include some basic components.

The basic components of a business budget are:

Estimated revenue. This is the projected income for the fiscal year. This income should include only the profits made from the sale of goods. In addition, it will include a sales forecast and an estimation of the cost of goods sold (COGS).

Fixed costs. Fixed costs are any expenditures that remain static. For example, the rent for the office or warehouse, labor costs, and insurance premiums would all be considered fixed costs. While they may fluctuate slightly, these are typically the same amount each time a payment is rendered.

Variable costs. The opposite of fixed costs, variable costs are fluctuating expenditures. For example, cost of goods sold (COGS), commissions, utility costs determined by use, and part-time wages would all be considered variable costs.

One-off expenses. Unlike fixed costs or variable costs, which are made repeatedly, one-off expenses are a one-time cost. For example, equipment upgrades, software purchases, and unexpected costs will fall into this category.

Cash flow. Revenue is based on the sales numbers, but cash flow is the actual inflows and outflows of money. Therefore, you will want to understand the actual cash moving in and out when budgeting.

Profits. Understanding your profits is an extremely important part of running a business. It can help you determine how much you should invest, whether or not you require additional investments or loans, and how much your business is growing. To determine profit, you would subtract estimated costs from projected revenue.

The Most Common Approaches to the Budgeting Process

While there are many ways someone can approach the budgeting process, the two most common approaches are the “top-down” approach and the “bottom-up” approach.

Top-down approach. As the name implies, this budgeting process works from the top-level executives down. The budget is prepared entirely by senior management and relies heavily on company objectives.

While lower-level management can use the budget to create its own departmental budget, there is little participation in the budgeting process outside top-level executives . Their involvement is more in implementation.

Senior-level management will inevitably have more experience with the budgeting process and have direct knowledge of historical data, allowing for more accurate projections. In addition, it can save time since the mid-to lower-level management will simply be handed a budget to follow.

Bottom-up approach. Unsurprisingly, the bottom-up approach follows the opposite path. This budgeting process begins at the departmental level with the mid-to lower-level management before moving up to top-level executives.

Each department creates its own master budget based on the general guidelines created by upper management that are passed up and combined to create a comprehensive budget for the company as a whole.

While this is a more inclusive approach, it can also be more time-consuming. Due to the day-to-day involvement of the departmental managers, though, the bottom-up approach can produce more realistic and accurate budgets.

The Steps of the Budgeting Process

By now, we understand that the budgeting process is the creation and implementation of a budget. There are many steps to the budgeting process—steps that may differ from business to business based on their approach—but four major phases.

Within each phase are many steps that will need to be completed to prepare a realistic, fully-fledged budget for the business.

The preparation phase.

Determine goals and objectives for the fiscal year

Obtain revenue forecasts and cost projections

Incorporate operating expenses and other expenditures

Review the budget

The approval phase.

Submit budget for approval

Obtain approval

The execution phase.

Issue the budget to each department

Implement the budget

The evaluation phase.

Examine monthly or quarterly financial reports

Examine year-end financial reports

Determine recommendations for the upcoming fiscal year

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Samantha is a lifelong writer who has been writing professionally for the last six years. After graduating with honors from Greensboro College with a degree in English & Communications, she went on to find work as an in-house copywriter for several companies including Costume Supercenter, and Blueprint Education.

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The 7 Steps of the Business Planning Process: A Complete Guide

In this article, we'll provide a comprehensive guide to the seven steps of the business planning process, and discuss the role of Strikingly website builder in creating a professional business plan.

Step 1: Conducting a SWOT Analysis

The first step in the business planning process is to conduct a SWOT analysis. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. This analysis will help you understand your business's internal and external environment, and it can help you identify areas of improvement and growth.

Strengths and weaknesses refer to internal factors such as the company's resources, capabilities, and culture. Opportunities and threats are external factors such as market trends, competition, and regulations.

You can conduct a SWOT analysis by gathering information from various sources such as market research, financial statements, and feedback from customers and employees. You can also use tools such as a SWOT matrix to visualize your analysis.

What is a SWOT Analysis?

A SWOT analysis is a framework for analyzing a business's internal and external environment. The acronym SWOT stands for Strengths, Weaknesses, Opportunities, and Threats.

Strengths and weaknesses include internal factors such as the company's resources, capabilities, and culture. Opportunities and threats are external factors such as market trends, competition, and regulations.

A SWOT analysis can help businesses identify areas of improvement and growth, assess their competitive position, and make informed decisions. It can be used for various purposes, such as business planning, product development, marketing strategy, and risk management.

Importance of Conducting a SWOT Analysis

Conducting a SWOT analysis is crucial for businesses to develop a clear understanding of their internal and external environment. It can help businesses identify their strengths and weaknesses and uncover new opportunities and potential threats. By doing so, businesses can make informed decisions about their strategies, resource allocation, and risk management.

A SWOT analysis can also help businesses identify their competitive position in the market and compare themselves to their competitors. This can help businesses differentiate themselves from their competitors and develop a unique value proposition.

Example of a SWOT Analysis

Here is an example of a SWOT analysis for a fictional business that sells handmade jewelry:

• Unique and high-quality products
• Skilled and experienced craftsmen
• Strong brand reputation and customer loyalty
• Strategic partnerships with local boutiques
• Limited production capacity
• High production costs
• Limited online presence
• Limited product variety

Opportunities

• Growing demand for handmade products
• Growing interest in sustainable and eco-friendly products
• Opportunities to expand online presence and reach new customers
• Opportunities to expand product lines
• Increasing competition from online and brick-and-mortar retailers
• Fluctuating consumer trends and preferences
• Economic downturns and uncertainty
• Increased regulations and compliance requirements

This SWOT analysis can help the business identify areas for improvement and growth. For example, the business can invest in expanding its online presence, improving its production efficiency, and diversifying its product lines. The business can also leverage its strengths, such as its skilled craftsmen and strategic partnerships, to differentiate itself from its competitors and attract more customers.

Step 2: Defining Your Business Objectives

Once you have conducted a SWOT analysis, the next step is to define your business objectives. Business objectives are specific, measurable, achievable, relevant, and time-bound (SMART) goals that align with your business's mission and vision.

Your business objectives can vary depending on your industry, target audience, and resources. Examples of business objectives include increasing sales revenue, expanding into new markets, improving customer satisfaction, and reducing costs.

You can use tools such as a goal-setting worksheet or a strategic planning framework to define your business objectives. You can also seek input from your employees and stakeholders to ensure your objectives are realistic and achievable.

What is Market Research?

Market research is an integral part of the business planning process. It gathers information about a target market or industry to make informed decisions. It involves collecting and analyzing data on consumer behavior, preferences, and buying habits, as well as competitors, industry trends, and market conditions.

Market research can help businesses identify potential customers, understand their needs and preferences, and develop effective marketing strategies. It can also help businesses identify market opportunities, assess their competitive position, and make informed product development, pricing, and distribution decisions.

Importance of Market Research in Business Planning

Market research is a crucial component of the business planning process. It can help businesses identify market trends and opportunities, assess their competitive position, and make informed decisions about their marketing strategies, product development, and business operations.

By conducting market research, businesses can gain insights into their target audience's behavior and preferences, such as their purchasing habits, brand loyalty, and decision-making process. This can help businesses develop targeted marketing campaigns and create products that meet their customers' needs.

Market research can also help businesses assess their competitive position and identify gaps in the market. Businesses can differentiate themselves by analyzing their competitors' strengths and weaknesses and developing a unique value proposition.

Different Types of Market Research Methods

Businesses can use various types of market research methods, depending on their research objectives, budget, and time frame. Here are some of the most common market research methods:

Surveys are a common market research method that involves asking questions to a sample of people about their preferences, opinions, and behaviors. Surveys can be conducted through various channels like online, phone, or in-person surveys.

• Focus Groups

Focus groups are a qualitative market research method involving a small group to discuss a specific topic or product. Focus groups can provide in-depth insights into customers' attitudes and perceptions and can help businesses understand the reasoning behind their preferences and behaviors.

Interviews are a qualitative market research method that involves one-on-one conversations between a researcher and a participant. Interviews can be conducted in person, over the phone, or through video conferencing and can provide detailed insights into a participant's experiences, perceptions, and preferences.

• Observation

Observation is a market research method that involves observing customers' behavior and interactions in a natural setting such as a store or a website. Observation can provide insights into customers' decision-making processes and behavior that may not be captured through surveys or interviews.

• Secondary Research

Secondary research involves collecting data from existing sources, like industry reports, government publications, or academic journals. Secondary research can provide a broad overview of the market and industry trends and help businesses identify potential opportunities and threats.

By combining these market research methods, businesses can comprehensively understand their target market and industry and make informed decisions about their business strategy.

Step 3: Conducting Market Research

Market research should always be a part of your strategic business planning. This step gathers information about your target audience, competitors, and industry trends. This information can help you make informed decisions about your product or service offerings, pricing strategy, and marketing campaigns.

There are various market research methods, such as surveys, focus groups, and online analytics. You can also use tools like Google Trends and social media analytics to gather data about your audience's behavior and preferences.

Market research can be time-consuming and costly, but it's crucial for making informed decisions that can impact your business's success. Strikingly website builder offers built-in analytics and SEO optimization features that can help you track your website traffic and audience engagement.

Step 4: Identifying Your Target Audience

Identifying your target audience is essential in the business planning process. Your target audience is the group of people who are most likely to buy your product or service. Understanding their needs, preferences, and behaviors can help you create effective marketing campaigns and improve customer satisfaction.

You can identify your target audience by analyzing demographic, psychographic, and behavioral data. Demographic data include age, gender, income, and education level. Psychographic data includes personality traits, values, and lifestyle. Behavioral data includes buying patterns, brand loyalty, and online engagement.

Once you have identified your target audience, you can use tools such as buyer personas and customer journey maps to create a personalized and engaging customer experience. Strikingly website builder offers customizable templates and designs to help you create a visually appealing and user-friendly website for your target audience.

What is a Target Audience?

A target audience is a group most likely to be interested in and purchase a company's products or services. A target audience can be defined based on various factors such as age, gender, location, income, education, interests, and behavior.

Identifying and understanding your target audience is crucial for developing effective marketing strategies and improving customer engagement and satisfaction. By understanding your target audience's needs, preferences, and behavior, you can create products and services that meet their needs and develop targeted marketing campaigns that resonate with them.

Importance of Identifying Your Target Audience

Identifying your target audience is essential for the success of your business. By understanding your target audience's needs and preferences, you can create products and services that meet their needs and develop targeted marketing campaigns that resonate with them.

Here are reasons why identifying your target audience is important:

• Improve customer engagement. When you understand your target audience's behavior and preferences, you can create a more personalized and engaging customer experience to improve customer loyalty and satisfaction.
• Develop effective marketing strategies. Targeting your marketing efforts to your target audience creates more effective and efficient marketing campaigns that can increase brand awareness, generate leads, and drive sales.
• Improve product development. By understanding your target audience's needs and preferences, you can develop products and services that meet their specific needs and preferences, improving customer satisfaction and retention.
• Identify market opportunities. If you identify gaps in the market or untapped market segments, you can develop products and services to meet unmet needs and gain a competitive advantage.

Examples of Target Audience Segmentation

Here are some examples of target audience segmentation based on different demographic, geographic, and psychographic factors:

• Demographic segmentation. Age, gender, income, education, occupation, and marital status.
• Geographic segmentation. Location, region, climate, and population density.
• Psychographic segmentation. Personality traits, values, interests, and lifestyle.

Step 5: Developing a Marketing Plan

A marketing plan is a strategic roadmap that outlines your marketing objectives, strategies, tactics, and budget. Your marketing plan should align with your business objectives and target audience and include a mix of online and offline marketing channels.

Marketing strategies include content marketing, social media marketing, email marketing, search engine optimization (SEO), and paid advertising. Your marketing tactics can include creating blog posts, sharing social media posts, sending newsletters, optimizing your website for search engines, and running Google Ads or Facebook Ads.

To create an effective marketing plan , research your competitors, understand your target audience's behavior, and set clear objectives and metrics. You can also seek customer and employee feedback to refine your marketing strategy.

Strikingly website builder offers a variety of marketing features such as email marketing, social media integration, and SEO optimization tools. You can also use the built-in analytics dashboard to track your website's performance and monitor your marketing campaign's effectiveness.

What is a Marketing Plan?

A marketing plan is a comprehensive document that outlines a company's marketing strategy and tactics. It typically includes an analysis of the target market, a description of the product or service, an assessment of the competition, and a detailed plan for achieving marketing objectives.

A marketing plan can help businesses identify and prioritize marketing opportunities, allocate resources effectively, and measure the success of their marketing efforts. It can also provide the marketing team with a roadmap and ensure everyone is aligned with the company's marketing goals and objectives.

Importance of a Marketing Plan in Business Planning

A marketing plan is critical to business planning. It can help businesses identify their target audience, assess their competitive position, and develop effective marketing strategies and tactics.

Here are a few reasons why a marketing plan is important in business planning:

• Provides a clear direction. A marketing plan can provide a clear direction for the marketing team and ensure everyone is aligned with the company's marketing goals and objectives.
• Helps prioritize marketing opportunities. By analyzing the target market and competition, a marketing plan can help businesses identify and prioritize marketing opportunities with the highest potential for success.
• Ensures effective resource allocation. A marketing plan can help businesses allocate resources effectively and ensure that marketing efforts are focused on the most critical and impactful activities.
• Measures success. A marketing plan can provide a framework for measuring the success of marketing efforts and making adjustments as needed.

Examples of Marketing Strategies and Tactics

Here are some examples of marketing strategies and tactics that businesses can use to achieve their marketing objectives:

• Content marketing. Creating and sharing valuable and relevant content that educates and informs the target audience about the company's products or services.
• Social media marketing. Leveraging social media platforms like Facebook, Twitter, and Instagram to engage with the target audience, build brand awareness, and drive website traffic.
• Search engine optimization (SEO). Optimizing the company's website and online content to rank higher in search engine results and drive organic traffic.
• Email marketing. Sending personalized and targeted emails to the company's email list to nurture leads, promote products or services, and drive sales.
• Influencer marketing. Partnering with influencers or industry experts to promote the company's products or services and reach a wider audience.

By using a combination of these marketing strategies and tactics, businesses can develop a comprehensive and effective marketing plan that aligns with their marketing goals and objectives.

Step 6: Creating a Financial Plan

A financial plan is a detailed document that outlines your business's financial projections, budget, and cash flow. Your financial plan should include a balance sheet, income statement, and cash flow statement, and it should be based on realistic assumptions and market trends.

To create a financial plan, you should consider your revenue streams, expenses, assets, and liabilities. You should also analyze your industry's financial benchmarks and projections and seek input from financial experts or advisors.

.jpg)Image taken from Strikingly Templates

Strikingly website builder offers a variety of payment and e-commerce features, such as online payment integration and secure checkout. You can also use the built-in analytics dashboard to monitor your revenue and expenses and track your financial performance over time.

What is a Financial Plan?

A financial plan is a comprehensive document that outlines a company's financial goals and objectives and the strategies and tactics for achieving them. It typically includes a description of the company's financial situation, an analysis of revenue and expenses, and a projection of future financial performance.

A financial plan can help businesses identify potential risks and opportunities, allocate resources effectively, and measure the success of their financial efforts. It can also provide a roadmap for the finance team and ensure everyone is aligned with the company's financial goals and objectives.

Importance of Creating a Financial Plan in Business Planning

Creating a financial plan is a critical component of the business planning process. It can help businesses identify potential financial risks and opportunities, allocate resources effectively, and measure the success of their financial efforts.

Here are some reasons why creating a financial plan is important in business planning:

• Provides a clear financial direction. A financial plan can provide a clear direction for the finance team and ensure everyone is in sync with the company's financial goals and objectives.
• Helps prioritize financial opportunities. By analyzing revenue and expenses, a financial plan can help businesses identify and prioritize financial opportunities with the highest potential for success.
• Ensures effective resource allocation. A financial plan can help businesses allocate resources effectively and ensure that financial efforts are focused on the most critical and impactful activities.
• Measures success. A financial plan can provide a framework for measuring the success of financial efforts and making adjustments as needed.

Examples of Financial Statements and Projections

Here are some examples of financial statements and projections that businesses can use in their financial plan:

• Income statement. A financial statement that shows the company's revenue and expenses over a period of time, typically monthly or annually.
• Balance sheet. A financial statement shows the company's assets, liabilities, and equity at a specific time, typically at the end of a fiscal year.
• Cash flow statement. A financial statement that shows the company's cash inflows and outflows over a period of time, typically monthly or annually.
• Financial projections. Forecasts of the company's future financial performance based on assumptions and market trends. This can include revenue, expenses, profits, and cash flow projections.

Step 7: Writing Your Business Plan

The final step in the business planning process is to write your business plan. A business plan is a comprehensive document that outlines your business's mission, vision, objectives, strategies, and financial projections.

A business plan can help you clarify your business idea, assess the feasibility of your business, and secure funding from investors or lenders. It can also provide a roadmap for your business and ensure that you stay focused on your goals and objectives.

Importance of Writing a Business Plan

Writing a business plan is an essential component of the business planning process. It can help you clarify your business idea , assess the feasibility of your business, and secure funding from investors or lenders.

Here are some reasons why writing a business plan is important:

• Clarifies your business idea. Writing a business plan can help you clarify your business idea and understand your business's goals, objectives, and strategies.
• Assesses the feasibility of your business. A business plan can help you assess the feasibility of your business and identify potential risks and opportunities.
• Secures funding. A well-written business plan can help you secure funding from investors or lenders by demonstrating the potential of your business and outlining a clear path to success.
• Provides a roadmap for your business. A business plan can provide a roadmap and ensure that you stay focused on your goals and objectives.

Tips on How to Write a Successful Business Plan

Here are some tips on how to write a business plan successfully:

• Start with an executive summary. The executive summary is a brief business plan overview and should include your business idea, target market, competitive analysis, and financial projections.
• Describe your business and industry. Provide a detailed description of your business and industry, including your products or services, target market, and competitive landscape.
• Develop a marketing strategy. Outline your marketing strategy and tactics, including your target audience, pricing strategy, promotional activities, and distribution channels.
• Provide financial projections. Provide detailed financial projections, including income statements, balance sheets, and cash flow statements, as well as assumptions and risks.
• Keep it concise and clear. Keep your business plan concise and clear, and avoid using jargon or technical terms that may confuse or intimidate readers.

Role of Strikingly Website Builder in Creating a Professional Business Plan

Strikingly website builder can play a significant role in creating a professional business plan. Strikingly provides an intuitive and user-friendly platform that allows you to create a professional-looking website and online store without coding or design skills.

Using Strikingly, you can create a visually appealing business plan and present it on your website with images, graphics, and videos to enhance the reader's experience. You can also use Strikingly's built-in templates and a drag-and-drop editor to create a customized and professional-looking business plan that reflects your brand and style.

Strikingly also provides various features and tools that can help you showcase your products or services, promote your business, and engage with your target audience. These features include e-commerce functionality, social media integration, and email marketing tools.

Let’s Sum Up!

In conclusion, the 7 steps of the business planning process are essential for starting and growing a successful business. By conducting a SWOT analysis, defining your business objectives, conducting market research, identifying your target audience, developing a marketing plan, creating a financial plan, and writing your business plan, you can set a solid foundation for your business's success.

Strikingly website builder can help you throughout the business planning process by offering a variety of features such as analytics, marketing, e-commerce , and business plan templates. With Strikingly, you can create a professional and engaging website and business plan that aligns with your business objectives and target audience.

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Why Business Budget Planning Is So Important

What is a business budget, business budget planning steps, benefits of business budget planning.

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Successful small businesses depend on the effectiveness of a business owner's planning process. One of the most critical elements of the planning process is business budget planning, which is also one of the final stages of the planning process. To begin, you have to gather company financial data, forecasts, and industry analysis to help you build your business budget.

Along with the valuable financial information and analytics, however, you also need to keep the company's general business and strategic plans in mind in order to build your budget.

A business budget is a dynamic, financial plan used to estimate a company's anticipated revenue and expenses for an upcoming time period. It is essentially a financial plan a business makes for a month, quarter, or year. It should be dynamic and flexible so it can be adjusted as business plans and the market environment change.

Business budgets should include every source of revenue, or income, anticipated by a firm along with all possible expenditures the firm might make during a specified time period.

A detailed and realistic budget is one of the most important tools for guiding your business. A budget provides essential information for operating within your means, managing unexpected challenges, and turning a profit. A proper budget will identify available capital, estimate expenditures, and anticipate revenues. Business owners must continually refer to their budget as a way of measuring forecasted budget figures against actual budgetary results in order to know where to make adjustments.

Planning should account for long-term needs as well. For example, if you anticipate a large expenditure one or two years down the road for computer upgrades or equipment maintenance, it's a good idea to start budgeting in advance.

A budget is a foundational  framework for your business finances, detailing past performance and providing a tool for forecasting the fiscal year, or another time period, with a view of assets, revenue, and expenses. Here is an overview of the budgetary process:

Budget Preparation

Budgets enable a business to accurately set goals, priorities, and spending caps, and detail where funding originates and where new strategies might bring revenue into the company coffers. The line items that command the most funding are high-priority items like the sources of revenue and the different types of expenses. These items demand precise bookkeeping and serve as performance indicators of the overall business strategy.

An effective budget should break down revenue and anticipated expenses by month, by quarter, or fiscal year. Depending on the size of your business, it should include separate budgets for each department. These departmental budgets should also be broken down by month or by quarter, and collectively, they will come together to form your  master budget .

The master budget is a comprehensive financial plan based on the strategic plan of the business firm. It is composed of two sub-budgets—the operating budget and the financial budget . Each of these includes a number of more specific budgets.

Businesses that rely heavily on seasonal sales revenue serve as a good example of why a budget is so important. If the months of June, July, August, and December typically generate 75% of your business's revenue, your budget will allow you to plan ahead. Having a strategy for distributing your revenue most effectively over the course of a full fiscal year will help maximize profits.

Budget to Evaluate Company Performance

In addition to being an important part of the planning process, budgets are necessary for evaluating the performance of your company over the course of each fiscal year. Common types of budgeting in business are:

• Static budgets : Static budgets are a type of operating budget that uses historical financial data to budget for revenue and expenses expected in the next time period. Typically used by very small businesses, these budgets require taking each line item and adding a percentage increase or decrease to it to reflect the next budget.
• Performance-based budgeting : This type of budget takes into account the inputs and outputs per unit of product or service in order to achieve maximum efficiency.
• Zero-based budgeting : A zero-based budget starts from scratch every time period and builds a new budget based on the conditions at that time. In other words, it starts from zero for each line item and uses internal and industry financial data to build the budget.
• Variance analysis : A variance-based budget is one where actual and expected values for every revenue and expense item are calculated. The results are used to try to bring the budget items back within a certain range and achieve improved efficiency

The use of one of these types of company budgets can be another tool for the financial analysis of the firm.

For example, if sales in the first quarter are lower than what you budgeted, you'll know to find expenses to cut later in the fiscal year in order to stay profitable. A more positive example might be sales of a new product that exceeds expectations. By tracking this trend and comparing it to what was budgeted, you will see that you have the additional revenue to perhaps revise the budget with plans to increase production or hire additional staff to handle the extra business.

Budget to Obtain Financing

A history of writing sound, detailed budgets and sticking to them can help show lenders or potential investors that you can develop a business plan and make it work.

Lenders and investors want to dig deeply into your finances and history. If they don't see evidence of strong budgeting practices, it might be a red flag that would turn them away.

If you're opening a new business and have little or no history, you need to make up for that lack of a track record with detailed support for your budget. This means doing research on the marketplace and showing how past trends or, perhaps a void in the industry, supports the numbers you present. This kind of attention to detail can help you gain serious consideration from lenders or investors.

Staffing for Budgeting

Even small businesses with only a few employees need to make sure they're staffed properly for writing and maintaining a budget. If, for example, you own and operate a small cafe, you might have a unique menu and a reputation for quality customer service, but that doesn't mean you're a financial professional.

If hiring a full-time person to handle your budget and other financial affairs is not realistic, consider part-time help or working with an outside consulting firm, especially early on and annually when it comes time to write a new budget for the next fiscal year. SCORE , a business mentorship organization affiliated with the U.S. Small Business Administration (SBA), is made up largely of volunteers with backgrounds in business and finance who provide guidance and advice to small businesses. This can be a valuable resource when you're just getting started or when you're confronted with a significant challenge. In addition to helping with budgeting or other problems, organizations like SCORE can put you in touch with other resources in your community.

Budgeting Software

Some of the best tools for writing a detailed budget and sticking to it are software programs, and they go beyond just Microsoft Excel or other spreadsheet programs. Some of the most useful budget software programs are:

• QuickBooks : One of the most user-friendly and inexpensive software programs that include budgeting.
• Budgyt : A user-friendly budget software program allowing for more than one profit and loss statement.
• PlanningMaestro by Centage : A cloud-based budgeting software program, including forecasting, for small and medium-sized businesses.

In addition, you already might be utilizing PayPal, Square, or other similar online services with your point-of-sale (POS) system . And like the software programs above, they offer tools for writing a budget and tracking revenue and expenses.

When looking for a budgeting software program, you usually want to look for these features:

• Departmentalized budgeting : Gives you the ability to create budgets by department, division, or profit center and merge them all into the master budget.
• Collaboration : Gives more than one person in your organization the ability to work on the budgetary planning process.
• Variance comparison : Gives you the ability to see actual vs. budgeted amounts on a line-by-line basis.

If a business does not develop a budget, it will face a host of problems. It is, effectively, flying blind if it is not aware how much revenue to expect or expenses to plan to during a given time period. Such a business will likely fail within the first two years after it opens.

The benefits of business budget planning are many. Here are some of the most important:

• Financial health : Without a business budget, it is impossible for you to know the financial health of your company. You will have no idea if you met or exceeded your goals.
• Strategic planning : A business budget allows you to develop a strategic plan since you will know the answer to issues like whether you can expand.
• Obtain debt financing : If a small business tries to obtain debt financing from a bank or other financial institution, it must produce a budget to show potential lenders.
• Attract investors : If a business wants to attract investors in the business, those investors will not put their money into the business unless they can see a budget.
• Tax preparation : A business budget assists in the preparation of income, sales, and payroll taxes.
• Decision making : In order to make decisions about any facet of the business, you have to know how much money is allocated to that item.

Corporate Finance Institute. " Types of Budgets ." Accessed March 9, 2021.

eFinance Management. " Variance Analysis ." Accessed March 9, 2021.

CompareCamp. " Best Budgeting Software - 2021 List of Top 10 Budgeting Software Tools ." Accessed March 9, 2021.

Business and Finance Experts Column. " The Benefits of Budgeting in a Business ." Accessed March 9, 2021.

The Four Main Types of Budgets and Budgeting Methods

Levels of involvement in the budgeting process, additional resources, types of budgets.

Four common ways to creating a budget

There are four common types of budgets that companies use: (1) incremental, (2) activity-based, (3) value proposition, and (4) zero-based. These four budgeting methods each have their own advantages and disadvantages, which will be discussed in more detail in this guide.

Source: CFI’s Budgeting & Forecasting Course .

1. Incremental budgeting

Incremental budgeting takes last year’s actual figures and adds or subtracts a percentage to obtain the current year’s budget.  It is the most common type of budget because it is simple and easy to understand.  Incremental budgeting is appropriate to use if the primary cost drivers do not change from year to year.  However, there are some problems with using the method:

• It is likely to perpetuate inefficiencies. For example, if a manager knows that there is an opportunity to grow his budget by 10% every year, he will simply take that opportunity to attain a bigger budget, while not putting effort into seeking ways to cut costs or economize.
• It is likely to result in budgetary slack. For example, a manager might overstate the size of the budget that the team actually needs so it appears that the team is always under budget.
• It is also likely to ignore external drivers of activity and performance. For example, there is very high inflation in certain input costs.  Incremental budgeting ignores any external factors and simply assumes the cost will grow by, for example, 10% this year.

2. Activity-based budgeting

Activity-based budgeting is a top-down type of budget that determines the amount of inputs required to support the targets or outputs set by the company.  For example, a company sets an output target of $100 million in revenues.  The company will need to first determine the activities that need to be undertaken to meet the sales target, and then find out the costs of carrying out these activities.

3. Value proposition budgeting

In value proposition budgeting, the budgeter considers the following questions:

• Why is this amount included in the budget?
• Does the item create value for customers, staff, or other stakeholders?
• Does the value of the item outweigh its cost? If not, then is there another reason why the cost is justified?

Value proposition budgeting is really a mindset about making sure that everything that is included in the budget delivers value for the business. Value proposition budgeting aims to avoid unnecessary expenditures – although it is not as precisely aimed at that goal as our final budgeting option, zero-based budgeting.

4. Zero-based budgeting

As one of the most commonly used budgeting methods,  zero-based budgeting starts with the assumption that all department budgets are zero and must be rebuilt from scratch.  Managers must be able to justify every single expense. No expenditures are automatically “okayed”. Zero-based budgeting is very tight, aiming to avoid any and all expenditures that are not considered absolutely essential to the company’s successful (profitable) operation. This kind of bottom-up budgeting can be a highly effective way to “shake things up”.

The zero-based approach is good to use when there is an urgent need for cost containment, for example, in a situation where a company is going through a financial restructuring or a major economic or market downturn that requires it to reduce the budget dramatically.

Zero-based budgeting is best suited for addressing discretionary costs rather than essential operating costs. However, it can be an extremely time-consuming approach, so many companies only use this approach occasionally.

We want buy-in and acceptance from the entire organization in the budgeting process, but we also want a well-defined budget and one that is not manipulated by people.  There is always a trade-off between goal congruence and involvement. The three themes outlined below need to be taken into consideration with all types of budgets.

Imposed budgeting

Imposed budgeting is a top-down process where executives adhere to a goal that they set for the company.  Managers follow the goals and impose budget targets for activities and costs.  It can be effective if a company is in a turnaround situation where they need to meet some difficult goals, but there might be very little goal congruence.

Negotiated budgeting

Negotiated budgeting is a combination of both top-down and bottom-up budgeting methods.  Executives may outline some of the targets they would like to hit, but at the same time, there is shared responsibility for budget preparation between managers and employees. This increased involvement in the budgeting process by lower-level employees may make it easier to adhere to budget targets, as the employees feel like they have a more personal interest in the success of the budget plan.

Participative budgeting

Participative budgeting is a roll-up approach where employees work from the bottom up to recommend targets to the executives. The executives may provide some input, but they more or less take the recommendations as given by department managers and other employees (within reason, of course). Operations are treated as autonomous subsidiaries and are given a lot of freedom to set up the budget.

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Budget and Budgetary Control

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on March 30, 2023

Fact Checked

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Table of Contents

Modern business is marked by instability and uncertainty. Due to competition, government policies, new regulations, new production techniques, and changing consumer behavior, businesses must adapt to survive.

Due to these issues, all organizations have started to use budgetary techniques. The technique of budgetary control is used to compare actual expenditures and budgeted expenditures, as well as to analyze and correct variations.

Budget and Budgetary Control: Definitions

A budget is a financial plan for a corporation that covers a specific future period. It is an expression of income and expenditures over a certain period. Budgets are plans that cover all functional areas of a business for a specific future period.

A budget is a system that is related to plan and control. Therefore, budgets also include budgetary control.

In a nutshell, a budget is concerned with policy framing whereas control is the budgetary implementation of the policy.

In a narrow sense, budgetary control is a cost control technique wherein actual cost is compared to budgeted cost, and thus is aimed at profit .

Definitions

The main definitions of the budget are summarized as follows:

Brown and Howard: "The budget is a predetermined statement of management policy during a given period which provides a standard for comparison with the results actually achieved."

George R. Terry: "A budget is an estimate of future needs arranged according to an orderly basis covering some or all the activities of an enterprise for a definite period of time."

Harry L. Wyllie: "Budgets are finished products...They are formal programs of future operations and expected results. Budgets result from forward thinking and planning."

Sanders: "The essence of a budget is a detailed plan of operations for some specific future period, followed by a system of records which serves as a check upon plan."

H. J. Weldon: "A budget is thus a standard with which to measure the actual achievement of people, departments, etc."

Hemass C. Heiser: "A budget is an overall blueprint of a comprehensive plan of operations and actions expressed in financial terms."

Budgetary Control

Budgetary control does not merely involve the matching of estimated expenses to actual expenses . In addition, it involves placing responsibility for failures.

The periodic checking up of income, costs, and expenses related to the administration of the budget is known as budgetary control.

Objectives, Importance, and Functions of Budgetary Control

The main objectives of budgetary control are as follows:

1. Production efficiency. Budgetary control is a technique marked by advanced planning for the effective use of materials. Thus, it leads to smooth production chains.

2. Success of costing records. Budgetary control improves the utility of cost accounts, which provides knowledge about future costs . Hence, cost variations can be minimized.

3. Future planning. Every producer plans a definite output for a specific period for which it is possible to use budgets to estimate the required amount of finance, materials, labor, and other expenditures.

4. Cost control. Budgetary control is useful for cost control because the production process rotates around predetermined targets. Here, actual costs are compared to budgeted costs, and any variations are corrected by the management.

5. Helpful in policy framing. Budgeting provides a tool through which basic policies are periodically examined, restated, and established as guidelines for the entire organization.

6. Budgets are solutions to basic problems. Budgeting obliges management to make an early study of its basic problems. It is useful in making rational decisions.

7. Control on income and expenditure. In modern times budgeting is used to direct capital and energy into the most profitable channels. Every producer classifies expenditures, and fixed expenses and variable expenses are useful to learn the break-even points for output and sales .

8. Knowledge of required capital. Budgetary control provides information about the amount of capital required for the smooth running of the organization.

9. Knowledge of potential for expansion. Every business leader aims to expand their business. Budgetary control provides helpful information about how much extra capital, labor, and risk will be needed for expansion efforts.

10. Administrative usefulness. Budgetary control is the eye of the managerial staff. No other form of management control reveals weaknesses in an organization as quickly as the orderly procedure needed for systematic budgeting.

11. Helpful to the nation. When proper budgeting is undertaken in nearly every enterprise, it can bolster the national economy by providing stable employment, economical use of tools, and effective prevention of waste.

Budget and Budgetary Control FAQs

How is budgetary control used to direct capital and energy into the most profitable channels.

Budgetary control helps to direct capital and energy into the most profitable channels by classifying expenditure and fixed expenses and variable expenses. This allows businesses to learn the break-even points for output and sales.

What is a budget?

What is a budgetary control.

Budgetary control does not merely involve the matching of estimated expenses to actual expenses. In addition, it involves placing responsibility for failures. The periodic checking up of income, costs, and expenses related to the administration of the budget is known as budgetary control.

What are the objectives of budgetary control?

The main objectives of budgetary control are as follows: production efficiency, success of costing records, future planning, cost control, helpful in policy framing, budgets are solutions to basic problems, control on income and expenditure, knowledge of required capital, knowledge of potential for expansion, administrative usefulnessand helpful to the nation.

What are the benefits of budgetary control?

Some of the benefits of budgetary control include cost minimization, early study of basic problems and their solutions, timely detection of weaknesses in an organization, and bolster the national economy.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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What Is a Budget?

Understanding budgeting, corporate budgets, personal budgets.

• Budgeting Myths

Budgeting Concepts

Sticking to a budget.

• Ways To Budget When Broke

The Bottom Line

• Budgeting & Savings

What Is a Budget? Plus 11 Budgeting Myths Holding You Back

A budget refers to an estimation of  revenue and expenses that's made for a specified future period of time. Budgeting usually occurs on an ongoing basis, with individual budgets being re-evaluated regularly.

Budgets can be made for any entity that needs or wants to spend money , including governments and businesses, people, and households of any income level.

Key Takeaways

• A budget is an estimation of revenue and expenses utilized by governments, businesses, and individuals of any income level.
• A budget is a financial plan for a defined period that can greatly enhance the success of any financial undertaking.
• Corporate budgets are essential for operating at peak efficiency.
• Aside from earmarking resources, a budget can also aid in setting goals, measuring outcomes, and planning contingencies.
• Personal budgets are extremely useful in helping individuals and families manage their finances.

Investopedia / Julie Bang

A budget is a microeconomic concept that reveals the trade-off made when one good is exchanged for another. In terms of the bottom line—or the end result of this trade-off—a surplus budget means profits are anticipated, a balanced budget means revenues are expected to equal expenses, and a deficit budget means expenses will exceed revenues. These principles hold true whether the budget is intended for an individual, a family, or a company.

First, let's take a quick look at the budgeting process for a corporation, and then personal budgeting.

Budgets are an integral part of running any business efficiently and effectively.

Budget Development Process

Corporate budgeting begins by establishing assumptions for the upcoming budget period. These assumptions are related to projected sales trends, cost trends, and the overall economic outlook of the market, industry, or  sector . Specific factors affecting potential expenses are addressed and monitored.

The budget is published in a packet that outlines the standards and procedures used to develop it, including the assumptions about the markets, key relationships with vendors that provide discounts, and explanations of how certain calculations were made.

The sales budget is often the first to be developed, as subsequent expense budgets cannot be established without knowing future cash flows . Budgets are developed for all the different subsidiaries, divisions, and departments within an organization. For a manufacturer, a separate budget is often developed for direct materials, labor, and overhead.

All budgets get rolled up into the master budget, which also includes budgeted financial statements , forecasts of cash inflows and outflows, and an overall financing plan. At a corporation, the top management reviews the budget and submits it for approval to the board of directors.

Static vs. Flexible Budgets

There are two major types of budgets: static budgets and flexible budgets. A static budget remains unchanged over the life of the budget. Regardless of changes that occur during the budgeting period, all accounts and figures originally calculated remain the same.

A flexible budget has a relational value to certain variables. The dollar amounts listed on a flexible budget change based on sales levels, production levels, or other external economic factors.

Both types of budgets are useful for management. A static budget evaluates the effectiveness of the original budgeting process, while a flexible budget provides deeper insight into business operations.

Advisor Insight

Derek Notman, CFP®, ChFC, CLU Intrepid Wealth Partners, LLC, Madison, WI

The importance of budgeting cannot be understated. A budget, also known as cash flow, is arguably more important than the actual cash that you have in your bank and investment accounts. Your cash flow is what allows you to pay for everything (or not).

Without knowing your cash flow, you could be putting yourself into a bad financial situation and not even know it. You can only get by without knowing your cash flow for so long before you get into financial trouble, so make the time to know the flow of your cash. Budgeting should be something that everyone does, regardless of their financial situation.

Individuals and families can have budgets, too. Creating and using a budget is not just for those who need to closely monitor their cash flows from month to month because money is tight. Almost everyone can benefit from budgeting—even people with large paychecks and plenty of money in the bank may find it difficult to cover the expense of an unexpected home repair .

To manage your monthly expenses, prepare for life's unpredictable events, and afford big-ticket items without going into debt, budgeting is essential. Keeping track of how much you earn doesn't require you to be a math whiz and doesn't mean you can't buy the things you want.

What it does mean is that you can maintain control over where your money goes and enjoy greater financial confidence and success.

How to Create a Budget

The specifics of budgeting will depend on your personal financial situation and goals. In most cases, though, the approach is the same no matter where you stand financially. Follow these seven steps to create your budget and adjust it as needed to reach specific financial goals.

• Add up all your income . This should include all income sources, such as a wages , salaries, tips, Social Security payments, disability, alimony, and investment income.
• Calculate your expenses . These are expenses you must pay each month, such as your mortgage or rent, food, transportation costs including gas, insurance premiums, taxes, childcare, internet service, your cell phone bill, and other utility payments.
• Identify debt payments . Be sure to include your debt, such as loans and credit card payments. Determine the minimum payment for each debt. Subtract that from your income as well.
• Review your spending . Keep track of every dollar you spend, whether you pay with a credit card or cash, to determine what your real expenses are. Keep your receipts and note down additional spending that you hadn't budgeted for.
• Create a spending plan . The amount of income you have left is what you can spend on discretionary expenses. These can include additional debt payments or rainy day savings. Your plan should also include things like entertainment or surprise expenses. Give every dollar a job, based on your goals and what you discovered when you tracked your spending.
• Set financial goals . Do you want to save money? Pay off debt? Stop spending more than you have? Decide on realistic goals. Remember, you can adjust these over time. Work on the most pressing goals first, such as paying off debt or creating an emergency fund.
• Adjust each month . Each month, look at your spending and whether you progressed toward or achieved goals, Reevaluate and adjust where you assign your discretionary spending. A flexible budget will help you avoid overspending.

Once you've created a budget, you may have to do some juggling, especially in the first few months. This means adjusting spending here and there so that you stay within your planned budget for income and expenses. And be sure to put it in writing: If you see it and commit to it, you'll have more incentive to stick to it.

11 Budgeting Myths That Can Block Your Success

Budgeting is a wonderful tool for managing your finances , but many people think it's not for them. It's important to become aware of budgeting myths—the erroneous logic that stops people from keeping track of their money and allocating it in ways that benefit them most. Then, you can create a budget that can help you live within your means, reach important goals, and build lasting wealth. Here are 11 budgeting myths.

1. I Don't Need to Budget

Getting and keeping a handle on your monthly income and expenses allows you to make sure that your hard-earned money is being put to its highest and best purpose. For those who enjoy an income that covers all bills with money left over, a budget can help maximize savings and investments .

If one's monthly expenses typically consume the lion's share of net income , any budget should focus on identifying and classifying all the expenses that occur during the month, quarter, and year. And for people whose cash flow is tight, the budget can be crucial to identifying expenses that could be reduced or cut, and minimizing any wasteful interest being paid on credit cards or other debt.

2. I'm Not Great at Math

Generally speaking, you don't need to be great at math to make and follow a budget. First of all, understanding general concepts relating to your income, spending, debt, saving, and allocating your funds are important. Then, the basic ability to add and subtract is most of what's called for. That's especially true if you're budgeting manually, with pencil and paper.

And now, thanks to budgeting software programs, math barely enters into it. You simply have to be able to follow instructions. Many of these programs are free and legitimate. Or, if you know how to use spreadsheet software, you can make your own ledger. It's as simple as creating one column for your income, another column for your expenses, and then keeping a running tab on the difference between the two.

3. My Job Is Secure

No one's job is truly safe. If you work for a corporation, being laid off due to a difficult economy, downsizing, or a takeover always is a possibility. If you work for a small company, it could die with its owner, be bought out, or just fold.

You should always be prepared for a job loss by having at least three months' worth of living expenses in the bank. It's easier to accumulate this financial cushion if you know the amount you're bringing in and spending each month, which can be monitored with a budget.

4. Unemployment Insurance Will Tide Me Over

Unemployment compensation is not a sure thing. Let's say a bad situation at work leaves you with no choice but to quit your job. Unless you can prove constructive discharge (that is, that you were virtually forced to resign), your departure will be considered voluntary, making you ineligible for unemployment insurance. Besides, the benefits may fall well short of the wages you're used to: in even the highest paying states, the average is less than $500 per week.

5. I Don't Want To Deprive Myself

Budgeting is not synonymous with spending as little money as possible or making yourself feel guilty about every purchase. The aim of budgeting is to make sure you're able to spend on what's needed and save a little each month, ideally at least 10% of your income. At the very least, budgeting can make sure that you aren't spending more than you earn.

Unless you're on a very tight budget, you should be able to buy baseball tickets and go out to eat. Tracking your expenses does not change the amount of money you have available to spend every month. It just shows you where that money is going and allows you to make decisions about changing your spending habits.

6. I Don't Want Anything Big

If you don't have any major savings goals (e.g., upsizing your living situation, starting your own business), it's hard to drum up the motivation to stash away extra cash each month. However, your situation and your attitudes likely will change over time.

Let's say that you and your partner live in New York City in a small one-bedroom apartment and things are going fine for both of you until your family dynamic changes. For instance, you may have a child or an in-law who comes to stay with you indefinitely. This may mean you'll need (and want) more room to accommodate the new addition. If you don't save up for anything big, you may not be able to afford this change in your living situation down the road.

7. I Won't Qualify for Student Financial Aid

Yes, the catch-22 of student financial aid is that the more money you have, the less aid you'll be eligible for. That's enough to make anyone wonder if it isn't better to spend it all and have no savings in order to qualify for the maximum amount of grants and loans.

But that catch mainly applies to earned income . Whether you are an adult student going back to school or the parent of a student headed to college, the Free Application for Federal Student Aid (FAFSA) form (used for Stafford Loans , Perkins Loans , or Pell Grants ), does not require you to report the value of your primary residence (if you own a home) or the value of your retirement accounts.

So if you want to save money without compromising your financial aid eligibility, you can do so by using your savings to buy a house, prepay your mortgage , or contribute more money to your retirement accounts. The savings that you put into these assets can still be accessed if you face an emergency, but you won't be penalized for it.

Even if you employ all the available legal strategies to maximize your financial aid eligibility, you still won't always qualify for as much aid as you need. So it's not a bad idea to have your own source of funds to make up for any shortfall.

8. I'm Debt-Free

Good for you! But being debt-free without any savings won't pay your bills in an emergency. A zero balance can quickly become a negative balance if you don't have a safety net. Budgeting can help you create one.

9. I Always Get a Raise or Tax Refund

It's never a good idea to count on unpredictable sources of income. This may be the year that your company is unable to give you a raise (or as much of a raise as you hope for). The same is true of bonus money. Tax refunds are more reliable, but this depends in part on how good you are at calculating your own tax liability.

Some people know how to figure how much they'll get in a refund (or how much they will owe) as well as how to adjust this figure through changes in payroll withholding throughout the year. However, changes in tax deductions , IRS regulations, or other life events can mean a nasty surprise when you prepare your tax return.

10. I Just Don't Have the Discipline

If you're still not convinced that budgeting is for you, here's a way to protect yourself from your own spending habits. Set up an automatic transfer from your checking account to a savings account that you don't see regularly (i.e., at a different bank). Schedule the transfer to happen right after you get paid.

If you are saving for retirement, you may have the option of contributing a set amount regularly to a 401(k) or other retirement savings plan. This way, you can pay yourself first, have enough money for the transfer, and know that you can meet your savings goal. 

11. It's a Luxury When I Barely Have Enough for the Essentials

Sometimes budgeting just isn't a priority because you have too much on your plate. But there are certain government programs that can help you manage your household expenses. For instance, the Supplemental Nutrition Assistance Program (SNAP) helps recipients of all income levels work with their food budgets to make their benefits go further.

At the very least, set up that budget so you get a feel for spending limits, any change in how you originally planned to allocate your funds, whether you're paying all you can to get rid of debt, or whether your slipping too far into debt.

In general, traditional budgeting starts with tracking expenses, eliminating debt, and, once the budget is balanced, building an emergency fund. But to speed up the process, you could start by building a partial emergency fund.

Emergency Fund

This emergency fund acts as a buffer as the rest of the budget is put in place and should replace the use of credit cards for emergency situations.

The key is to build the fund at regular intervals, consistently devoting a certain percentage of each paycheck toward it, and if possible, putting in whatever you can spare on top. This will get you to think about your spending, too.

You should only use your emergency fund for true emergencies. For instance, if you lose your job and need to pay for expenses, you could tap into your rainy day fund until you join the workforce again. You can also use this money if you have an unexpected medical emergency that arises.

You would save money if you used your emergency fund to eliminate credit card debt , but the purpose of the fund is to prevent you from having to use your credit card for paying for unexpected expenses. With a proper emergency fund, you will not need your credit card to keep you afloat when something goes wrong.

Downsize and Substitute

Once you have a buffer between you and high-interest debt, you can start the process of downsizing. The more space you can create between your expenses and your income, the more income you will have to pay down debt and invest.

This can be a process of substitution as much as elimination. For example, cancel any recurring subscriptions that you don't regularly use or need. Use half of the money you save to invest for a goal or to pay off outstanding debts. Save the other half to bulk up your emergency fund.

Although eliminating expenses entirely is the fastest way to a solid budget, substitution tends to have more lasting effects. So consider:

• Shopping with friends and family so you can split the cost, especially if you buy in bulk
• Carpooling or taking public transportation to cut down on car-related costs

People can sometimes cut too many expenses so that they end up with a budget that they can't stick to. Substitution, in contrast, keeps the basics while trimming costs.

Find New Sources of Income

Once you have your budget in place and have more money coming in than going out, you can start investing to create more income.

It is better to have no debt before you begin investing. If you are young, however, the rewards of investing in  higher-risk, high-return securities like stocks can outweigh most low-interest debt over time.

Keep your receipts so that you know exactly how much you spend each month. This can help you determine how much to budget for any expenses that may change from month to month.

You've got your budget set up. Now you've got to stick to it. But that credit card still calls your name, your clothes budget seems awfully small, and you feel deprived. At such moments, it helps to revisit the whole reason for a budget—to help you manage your finances, achieve financial goals, and lead a life free from fear of financial pitfalls.

Remember the Big Picture

Your budget can keep you out of overwhelming debt and help you build a financial future that will give you more freedom, not less. So think about the future you want and remember that keeping to your budget will help you get there. Adding to your debt load , on the other hand, will mean that your financial future could be less bright.

Review Your Spending

Every time you enter your spending in your software or budget notebook, review everything that's been spent to date and compare it to income received. This will keep you abreast of where things stand and encourage you to keep at it, especially if you are reining in your spending as intended. This daily or weekly activity can give you an enormous sense of accomplishment and keep you on track.

Remove the Options That Allow You to Cheat

Make it more difficult to make impulse purchases. In other words, set up barriers that give you time to think: "Is this purchase necessary?" Opt out of retailer email lists. Remove your stored payment information on your favorite online shops so you can't just click to order. Adjust your phone settings to block tracking and advertising as much as possible.

Find Some Support

If you feel like you're the only one in your group who is on a budget, search for some like-minded folks. You could find an online forum, a monthly meeting, or even a couple of friends who will listen to your concerns and share their budgeting experiences. Set up accountability calls with your frugal buddies to talk things over and keep temptation at bay.

Just know that you're not the only person setting sensible financial limits for yourself.

Go Old School

There's something powerful about handing over a stack of $20 bills for a purchase. You have to confront the money you're about to spend and accept that the spending is worth it. Swiping a debit card , on the other hand, may not feel nearly as real. 

Similarly, paying bills by writing checks and promptly entering the sums in your register keeps you up-to-date on how your account is affected in a way that autopay doesn't.

You don't have to use cash exclusively or completely forgo online payments. But handling transactions in hands-on ways can make you realize how much you're spending and enhance the power of self-regulation.

Reward Yourself

If you constantly look at what you have to give up, the very act of budgeting becomes distasteful. A mixture of long- and short-term gifts to yourself will help keep you motivated.

When you've been faithful to your budget for a month, give yourself a reward. Even small ones such as a night out with friends, a concert, or a little extra cash for spending can help.

Keep visual reminders of these rewards or the things you're saving up for. Start building associations in your brain that make sticking to your budget an enjoyable activity with happy results.

Schedule a Periodic Budget Evaluation

It's difficult to predict correctly how much money you'll need in every category of your budget. For instance, a new job may necessitate a wardrobe change and your existing clothing budget may not cut it. That's why it's important to conduct a regular check on how well your budget is working. It may need tweaking. This is to be expected. Just make sure that you always keep your long-term financial goals in the picture.

Educate Yourself

Learn all you can about finances, money management , and how you can best invest in yourself. Talk to your financially savvy friends and seek out real-world tips and advice from people who are doing well with their money.

The more you learn about handling money wisely and the rewards that can result from such an effort, the more concrete and acceptable the reasons for budgeting will be.

8 Ways to Budget When You're Broke

Budgeting is smart, but if you're suffering from mounting bills and a lack of funds, it may not be where your focus is. In such circumstances, consider some additional steps that you can take to gain control of your finances.

1. Avoid Immediate Disaster

Don't be afraid to request bill extensions or payment plans from creditors. Skipping or delaying payments only worsens your debt. And late fees ding your credit score. 

2. Prioritize Bills

Go over all your bills to see what can and should be paid first, prioritize those that are late, and then set up a payment schedule based on your paydays.

Call the bill companies to see how much you can pay now to get back on track toward a positive status. Explain that you are taking strict measures to catch up. Be forthright about the amount you can afford to pay now. Don't just promise to pay the full amount later.

3. Ignore the 10% Savings Rule

Stashing 10% of your income into your savings account is daunting or impossible when you're living paycheck to paycheck. It doesn't make sense to have $100 in a savings plan if you are fending off debt collectors . Your savings can wait until you can reclaim financial stability.

4. Face Your Spending

To fix your finances, you need to get a handle on your outlay first. Online banking and online budgeting software can help you categorize spending so you can make adjustments. Many people find that just by looking at aggregate figures for discretionary expenses , they are spurred to reduce excessive spending.

5. Eliminate Unnecessary Expenses

Hopefully, your budget has given you a sense of where your money goes. Now it's time to tighten up. Start cutting back on items that you wouldn't miss. Change habits that are costing you, like letting food spoil before you can eat it. Prepare meals at home instead of going to restaurants or getting takeout.

You may be able to reduce some expenses that you shouldn't drop. For example, you might be able to lower your auto insurance premium by switching carriers.

6. Negotiate Credit Card Interest Rates

Those ultra-high interest rates on your credit cards aren't fixed in stone. Call the card company and ask for a reduction in the annual percentage rates (APR) . If you have a good payment record, your request might be approved. This won't lower your outstanding balance, but it will keep it from mushrooming as fast.

7. Track Your Spending

Once you've gone through these steps, monitor your progress for a few months. You can do this by writing everything you spend in a notebook, with budgeting apps on your phone, or with the software you may already use for your budget.

Ensure that every cent is accounted for. Fine-tune and adjust your spending as needed after each month. This not only can help get you out of financial trouble. It also can put the spotlight back on the importance of your budget.

8. Seek New Income

For the time being, saving and investing is out. But consider ways to increase your earnings: working overtime, getting a second job, or picking up some freelance work.

How Do You Create a Budget?

Creating a budget takes some work. You'll need to calculate every type of income you receive each month. Next, track your spending and tabulate all your monthly expenses, including your rent or mortgage, utility payments, debt, transportation costs, food, miscellaneous spending, and more. You may have to make some adjustments initially to stay within your budget. But once you've gone through the first few months, it should become easier to stick to it.

What Is the 50-20-30 Budget Rule?

The 50-20-30 budget rule was popularized by Sen. Elizabeth Warren (D-Mass.) in her book All Your Worth: The Ultimate Lifetime Money Plan. The plan entails dividing all of your after-tax income into 50% for your actual needs, 30% for anything you want, and 20% for savings.

How Does Budgeting Help a Business?

Just like budgets help people, corporate budgeting helps businesses stay on top of their finances. It also helps business leaders make very important investment decisions, manage and meet goals and objectives, and identify any financial hurdles that come their way.

A budget often conjures up images of complicated financial documents. But in reality, it's a money management tool that can be used by various entities, including governments, businesses, and individuals/households of every income level. Budgets can help prepare you to make better decisions about your money so that you can secure a brighter financial future.

Forbes Advisor. " The States With The Best And Worst Unemployment Benefits—And Why They’re So Different. "

Federal Student Aid, U.S. Department of Education. " Asset Net Worth (2023-24) ."

Federal Student Aid, U.S. Department of Education." 6 Things Students Need Before They Fill Out the 2024-25 FAFSA Form ."

USA.gov. " Government Benefits ."

FiftyThirtyTwenty.com. " Income + Financial Stability in America ."

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Top 3 Steps to Building an Effective Budget Planning Process and Team

1. Assemble your budget team

2. create a budget calendar and approach, 3. build your budget.

An effective budget planning process is not something that happens overnight. It takes time, careful planning, and a team of dedicated staff members. As a team, you will set organizational financial goals, review income and expenses, and analyze the budget process. All while you prioritize the business strategy, vision, and goals of your small business.

In this article, you'll learn the top three steps you can take to build an effective budget planning process. You'll also learn how to assemble your team, create your budget calendar, and build your budget.

Most small businesses do not plan or implement a budget. According to Small Business Trends , 61% of SMBs with less than 10 employees do not see the value in having an official budget in place. As you assemble your budget team, you’ll quickly realize the benefits of articulating your business strategy, vision, and goals.

Your budget team can articulate your financial objectives, so you can create benchmarks to monitor your progress toward your goals. As you and your budget team focus on your progress and performance, you’re better able to see those instances where you’ve veered off course. You can then take corrective action as a team to ensure that you’re on track for the future.

The effective budget planning process doesn’t have to start out complicated. You can start with a simple (and free) budget template for your small business. Your goal with your budget template and calendar is to stay on track and organized across your company. While it may seem simple, it’s easy to miss dates and deadlines.

A budget calendar and your budgeting approach help you forecast income and expenses, but it also gives you the opportunity to follow up with customers and prospects. As you personalize your emails, develop deeper relationships with your audience, and create a sense of value and urgency, you’ll discover even greater returns than you may have even forecasted.

Entering projected annual revenue and expenses into the free small-business budget template ( Source )

As you build your budget planning process, determine your expenses, and decide what it will take to reach your goals, you should also factor in your revenue. Take the time you and your team need to fully understand your funding and expenditures, but factor in your priorities. What are the key programs and events that you can’t afford to lose? Make your marketing budget a priority too!

Give yourself and your team enough time to fully understand, plan and implement your plan. Leave yourself open to the certainty that you will not think of everything. Where there are gaps or shortfalls, you’ll need to evaluate options. What will you need to do to reach your goals? It’s not an easy process, but it’s essential that you clearly understand the trade-offs.

Build a future-proof budget with these tools

As a small business leader, you’ll need to improve your budget process to predict your income, understand your profits, and analyze your returns on investment. It might feel challenging or even overwhelming, particularly if your previous attempts have fallen flat. That’s why we’ve gathered templates, tips, and recommendations to streamline the process.

With our knowledge base of articles and resources, you’ll find the answers you need to move forward. These resources offer the insights you need as you plan for and build your budget process to further support the growth and success of your small business.

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About the author.

Esther Lombardi

Esther Lombardi is a writer specializing in topics such as marketing, healthcare, finance, legal, real estate, and tech topics. She has a master's degree in English Literature. With professional experience in web technology, she is a frequent contributor to trusted business resources including Capterra.

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