Budget planning is the process by which a company or individuals evaluate their earnings and expenses and project their monetary intakes and outakes for the future. The goal is to lay out all necessary components and brainstorm future goals. Budget planning may be completed in one meeting or it may take weeks of evaluating available data to finalize.
Revenues are earnings from sales, less the cost of goods sold. In a personal budget, it is wages. During the budget planning process, use historical data, such as wage stubs and prior year financial statements, to set a baseline, then consider the future. Do you anticipate an increase? What costs will be associated with this increase? For example, if you intend to produce more widgets, how many man hours will it take and how much will materials cost to earn the extra revenue?
The second half of the budget is expenses. Begin with the expenses for the previous year, then adjust for increased usage, streamlining and inflation. This is a good time to negotiate new contracts with vendors and to look for ways to achieve cost savings. Remember to budget for unexpected expenses, such as repairs and gifts. Remember to allow for entertainment and annual expenses, such as insurance premiums and winter snow removal.
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Use the budget planning process to set goals and stress the importance of living within a budget. Have everyone involved in the process commit to working toward a successful financial year. Follow up periodically with feedback. Compare actual results for the month or quarter to the budget. Where did you succeed and where did you fail? Use the information to improve your future budgeting. A budget is only useful when it is actively put to use.
Forecasting future income and expenses should be conservative in nature. This means any amounts that you are estimating, you should overestimate expenses and underestimate income slightly. Think of it as a realistic but worse-case scenario. It is much easier to find ways to spend extra money than it is to replace income that is not earned. Combine this with a possible high debt-to-income ratio or a bad credit score and you may be headed for bankruptcy.
Budgets are designed for flexibility. As you find out actual numbers, such as wage increases received after the budget is finalized, update the budget going forward. The more accurate you maintain the budget, the more use you will get out of it. Be ready to revisit the budget planning process periodically and consider budgeting for more than a year in the future. A five-year plan can help you keep focused on long-term goals.