If you need help creating a budget you’re in the right place. Creating a budget can help you in more ways than one. “Budgets are a necessary evil. They are the only practical way to get a grip on your spending and to make sure your money is being used the way you want it to be used.” (CNN Money) The benefits of creating a budget absolutely outweigh the painstaking effort it takes to create one. We recommend using these guidelines to make it easier.
When creating a budget, they must be account-based
The key to creating a budget is estimating what your spending will be like. To do this, you first have to estimate what you will be spending on each area or account within your business. Example accounts/areas could be utilities, overhead, inventory, research, and development. Based on this process, all transactions you make can be attributed to one of those accounts.
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Budgets must be based on individual accounts to be accurate. As you move from creating a budget to actually using it, accounts will let you know where you might be overspending, which is essential knowledge for a business owner.
Tip: A common mistake people make when trying to create their first budget is not identifying all their accounts. This makes tracking spending virtually impossible and renders the budget inaccurate. Take the time to be thorough with budgeting for each account.
Create separate budgets for P&L and balance sheet accounts
Separating out operating expenses from capital investments is important as your business grows and evolves. Sauvé business owners understand the importance of both budgets and update them accordingly.
1. P&L accounts: Income and expense accounts that happen during a specific time frame, i.e. last fiscal year. Some examples include utilities, cost of goods sold, selling general and administrative expenses, etc.
2. BS accounts: The Balance Sheet expresses the entity’s wealth at a moment in time, i.e. as of December 31, 2013. Some examples include fixed assets, inventory and bank accounts.
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Base on prior-year or use baselines
If you’re staring at a blank canvas trying to create a new budget, you’re probably wondering how to begin-especially if it’s for a brand new business. There are two solutions for starting fresh that don’t require you to start totally from scratch.
1. Use prior year data. If your business has any expenditure from the previous year, use those numbers as a standard to follow. Even one month’s worth of utility bills or overhead expenses will be a good indication of what to expect going forward. Then, you can adjust your budget each month if you know there will be variances (for example a busy season or higher production period in part of the year.)
2. Use baselines. The bottom line here is-don’t recreate the wheel. Chances are you aren’t the first person to create a budget for your type of business or industry. Search online, in trade journals and blogs to find the norm. Use these baselines not only for budgets but also to see how your business performs in comparison to your competitors.
These guidelines should be helpful for developing your first or next budget. Feel free to email me or use the comments section below if you have any questions about applying these guidelines.
By David Olson, CPA
Manager at WHH
