Year End Budgets

Year end planning is not complete without a budget. Creating a budget can be intimidating to many business owners, but it does not need to be. Simple, yet effective, budgets can be developed using MS Excel.
One of the main reasons business owners procrastinate budgeting is because they do not know where to start. The last 18-24 months have proved to be interesting from an accounting point of view. Usually, historical trends provide helpful information that can be used when creating budgets. If the past two years do not represent your typical results, now what?
There are three main approaches to budgeting:

  1. Top Down Budget - Start by estimating your expected revenues. Generally, past year revenues are adjusted down or up based on historical trends. Once you have your revenue amounts you can determine what your expenses should be. When you use this approach, you assume that many of your expenses are directly correlated to revenue.
  2. Bottom-up Budget - Start by estimating your expenses. Again, past year expenses are an indicator of what the amounts should be in the current year adjusted based on historical trends. Once you know your total costs you can estimate how much revenue you need to generate to achieve your desired profits.
  3. Zero-Based Budget - Sometimes is it is best to create a budget from scratch, i.e., not using past-year data, but instead estimating what you expect to happen over the next 12 months. This approach is more time consuming, but can be beneficial if the past is not a good indicator of the future.

Choose the budgeting approach that makes the most sense to you. For example, maybe you are more comfortable with estimating your expenses than revenues. Many expenses tend to be fixed or semi-fixed in nature, such as rent (or mortgage), utilities, payroll, telephone, insurance, advertising, etc. Summarize all of your expenses by month since some items will recur monthly, while others quarterly, or yearly. With all of your expenses tallied, you can determine how much revenue you need to generate. Is this figure realistic? If so, great. You have your budget. If not, revisit your expenses to determine which ones are not necessary or possibly estimated too high.

If you are more comfortable creating a top-down budget start with your estimated revenues. Determine which expenses are directly correlated to revenues, such as advertising, marketing, or payroll. Some of your expenses, as with the Bottom-up budget, will be fixed in nature, such as rent, utilities, and insurance. Be sure to include all expenses, even those that are not directly tied to revenue generation.

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