When it comes to budgeting, there is no one-size-fits-all approach.
Every business is different, and so each will have its unique budgeting process.
However, there are some general principles that all businesses can follow when putting together a budget.
In this article, we'll look at the different types of budgets that businesses use and then consider an example of the budgeting process steps in action.
By the end, you should have a good understanding of the basics of budgeting for businesses.
Types of Budgets
Different “types” of budgets are often used in conjunction with each other or at different times during a business season.
We’ll look at three of the most common ones to keep things simple.
- Master Budget
The master budget is an overarching budget that presents a business’ broad goals and allowance. Each department’s budget is made in consideration of this master budget and fitted into it.
- Static Budget
A static budget is a fixed budget in which elements remain the same, despite changes in a business’s income or activity.
This type of corporate budget is a starting point and is often used with the type that follows next, the flexible budget, to measure performance against expectations.
- Flexible Budget
A flexible budget is a more sophisticated budgetary tool that is adjusted in light of changing activity levels.
A business' size will often dictate which types of budgets they use.
For example, large businesses may utilize departmental budgets, which are collated to produce the master budget.
On the other hand, small businesses, such as cottage sellers dealing in food, may only need a single static or flexible budget as they are not big enough to warrant the extra level of detail involved in creating a master budget.
The Budgeting Process
As we’ve mentioned, there is no perfect process that every business can follow, but some fundamentals exist.
Here we outline 8 steps of a budgeting process, with an extra step that isn’t part of the core process but is necessary nonetheless.
1. Review Previous Period
When preparing to budget, you must review your previous period to see if there’s anything you can learn from it.
Take a look at your metrics. You must look for anything that worked particularly well and anything that failed.
You’ll also need to calculate your existing revenue to know what you have in reserve to spend in the new season.
2. Set Out Goals
Next, you need to set out your broad goals.
What do you want to achieve? For example, if a company wants more customers, it must prioritize marketing.
Affiliate marketing is an excellent choice for corporate budgeting because payments are made only after confirmed conversions.
On the other hand, if it wants more sales from existing customers, it must work on improving existing offerings to offer these customers more.
If the business wants more staff, it’ll have to budget to spend more on salaries.
Goals will set the tone for the budget at large.
3. Forecast Incoming Revenue
This step helps them identify areas where you may need to cut or increase spending to achieve desired results.
Next, you must forecast incoming revenue.
The forecast will give the company an idea of what can be spent in the future.
Here it’s important not to be too optimistic. Be conservative with the initial budget process estimates.
Having more than you expected to is far better than having less.
4. Set Out Fixed Costs
Setting out fixed costs is an integral part of budgeting. This ensures all necessary expenses are covered and allows for accurate forecasting. Without fixed costs, it would be difficult to know how much money would be required to cover all expenses.
Fixed costs are expenses that don’t change or change predictably. For example, if a business has a brick-and-mortar presence, the rent and rates for the building are fixed costs.
Another example of an essential fixed cost in ecommerce is fees for hosting services.
Salaries are a fixed cost to consider when preparing budgets and the one a business has the most control over.
5. List Variable Costs
Variable costs fluctuate, either with the market at large or seasonal changes.
Some standard variable costs are advertising (some costs can be cut here by opting for targeted advertising), fees for SaaS solutions, and business travel. Any of these can change unexpectedly.
You must keep a careful eye on variable costs because if they get out of control, they can eat into profit margins.
On the other hand, if they’re too low, it might mean that you aren’t making the most of your resources.
6. Forecast Additional Spending
The final step of outlining costs in budgeting processes is predicting additional expenses. These are things that aren’t a feature every season.
Some additional expenses are renovations to a building, a rebranding project, or even a site migration.
It’s good to save a certain amount of money as a “rainy day fund” for any items here.
7. Review Budget and Make Changes
Once everything is laid out, you must now review the budget and make any changes.
Ideally, place each item on the budget into one of four categories during the budget management process.
- Necessities for items that are vital.
- Priorities for items in line with the goals set out in the beginning.
- Secondaries for things that are needed but not immediately necessary.
- Extras for items that aren’t pressing. You may decide to cut some of these or keep them in mind for future budgets.
8. Approve Budget/Send It For Approval
Once the budget is laid out, send it for approval.
If you’re the senior-most member, this step is just an additional chance to review everything and ask for clarification.
Extra Step: Communicate Budget Clearly
Once the budget is approved, it is essential to clearly explain it to team members.
A big part of the purpose of budgeting is to bring clarity.
This way, everyone understands the reasoning behind the budget and knows what is expected of them and what is possible going forward.
A clear and concise explanation of the budget will help ensure everyone is on the same page and working towards the same goal.
Wrap Up
The budgeting process is a critical part of any business.
By taking the necessary steps, businesses can ensure that they make the most efficient use of their resources and are on track to meet their goals.
Remember, the budgeting process steps outlined above are just a solid example, and as you become familiar with the process, you can add or remove steps as is practical for you.
Most importantly, you must make sure to stick to the budget by any means necessary.
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Garan is a writer interested in how tech reshapes the environment, and how the environment reshapes tech. You'll usually find him inoculating against future shock and arguing with bots.
