How We Budget – Overview

Posted on October 4, 2013


This is the second in a series of articles on small business budgeting.

In a recent post, we laid out the case for why we think small businesses should use budgets.  We now turn in the coming weeks to how to actually create a budget.  In this post, we’ll give a brief overview of our process.

Use Excel.  While specialized budget software exists, we have never found it to be as useful as Excel, because of the total flexibility that Excel provides.  This flexibility comes at a cost of needing to create your own budget structure within Excel and the real risk of making calculation errors in Excel, but we think the benefits of using Excel far outweigh these costs.

Budget by Month for a One-Year Period.   We typically budget for a year because it matches with the tax return period.  Thus the budget can be used as part of the business’ and business owner’s annual tax planning.  Within the yearly budget, we budget by month so that we can track budget vs. actual performance in a timely fashion throughout the year.  Longer budget periods–such as quarterly–reduce the usefulness of the budget for providing timely feedback.

Create Four Separate Excel Files.  We create separate Excel files–one for the overall budget, one for revenues, one for employee-related expenses, and the last for other operating expenses.  In our experience, the techniques for budgeting revenues, employee-related expenses, and other operating expenses are so different that they need to be kept separate.  We complete each of these three budget files separately and then link them into an overall budget file to generate the total budget.

Start on the budget in November, Finish in January.  Assuming a calendar year budget, we typically start on the budget process in early November after October’s month-end activities are complete.  We use the most recent historical 12-month data from November 1 of the prior year to October 31 of the current year.   We’ll work on the three files–revenues, employee-related expenses, and other operating expenses–gradually over a 45-to-60-day period that concludes in early January after the routine December year-end activities are completed.  At this point, we update the historical data to use the full calendar year just ended, and then update the budget as necessary and finalize it by mid-January.

Publish Final Budget & Enter in Accounting Software.  We’ve seen companies invest considerable time to work on a budget, only to not finalize the budget or to never look at the budget again after it’s done.  While there’s a large benefit just from working through all the assumptions required to prepare the budget, not taking the last steps to complete the budget, publish it, and enter it in your accounting software significantly diminishes the benefits achieved.

Track Budget vs. Actual Monthly.   Once the final budget is in your accounting software, you need to compare the actuals to the budget each month.  If you skip this step, you’ll significantly reduce the likelihood that you’ll actually achieve what you budgeted.  The monthly review can be completed in less than 30 minutes a month, and this time will pay for itself in identifying areas where you should devote attention to insure you “make your numbers.”

In our next post we’ll look at budgeting revenues.

Posted in: Budget