Components of Budget Preparation

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Preparing a budget involves translating plans, goals and projections into numbers.
Preparing a budget involves translating plans, goals and projections into numbers. (Image: calculator, gerer, to make its accounts image by free_photo from Fotolia.com)

Budgets transform abstract goals into clear operational ones. They also help companies understand their resources, capacities, limitations and necessities to both stay afloat and profit. To succeed at budgeting, you'll need to research, investigate, project and plan in a detailed, methodical way. The often tedious process of devising a good budget can be alleviated by having your facts, plans and figures together.

Objectives and Goals

Before you can begin budgeting, you have to know the outcomes you're trying to achieve. Is your organization trying to grow, sustain, avoid bankruptcy or hunker down? Just as importantly, you have to determine your strategy for achieving these objectives. It could involve significant reinvestment in your business to push forward into growth, or maybe you are planning to make a strong push for higher revenue using lean production or by maximizing existing labor. Perhaps cost cutting is the essence of your strategy. The budget is a means of expressing your direction.

Determining Resources

To know what you can spend, you need to take inventory of your financial and capital resources. This includes reviewing historical revenues, projecting reasonably assured future revenues, and assessing your current cash and assets.

Calculating Liabilities

Entitlements are the costs and expenses that get top priority and that you cannot avoid. Taxes and debt payments are two of the most common entitlements. Start calculating your liabilities with these and then work your way through expenses that you need most such as labor, operations costs, and insurance. Eventually you'll get to the items that you may spend on which are the most optional--tally these too. Keep an itemized list of all liabilities by category.

Soliciting Requests

Good top-level managers know to get input from key people in their organizations. When budgeting, you'll need to what expenditures might make a real difference in your organization's performance. Soliciting input and even asking for "wish lists" from managers and important employees will give you ideas about your business and perhaps items you hadn't considered that need to be included in the budget.

Projections

Prepare your projections for revenues. While there is no one formula for revenue projections, nor is projection commonly accurate, you want to try to determine what's reasonable to expect in the way of inflows. Historical data on your company's performance as well as industry data may provide foundations for this task. If you are giving top-down directives for revenue growth or financial performance, then you can take your expectations and beliefs about what is possible into account when deriving your projections. Many companies use projections to then assign to different departments, units and managers as a concrete set of financial goals and expectations.

Cost Analysis

Many companies use budgeting as an opportunity for reflection and investigation. Take a look at your current costs and question whether they are valid and useful. You may find room for cost-cutting or processes that can be streamlined. At the same time, you may also identify areas where extra resources will make a difference in achieving your desired financial outcomes. Either way, budgets involve assumptions and educated guesses so investigating your costs thoroughly will help.

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