The six letter words BUDGET is one executives know and love so much but seldom want to spend their time on. Today, I’ll take you on a journey to help you understand how you could make the most of budgets and never avoid them henceforth. Are you ready?
What does budgeting mean?
A budget is a financial plan for a specified period. It is an hypothetical representation of the financial destination you desire to arrive at, after a specified period and given specific market conditions. Budgets can be used for both personal and organizational financial management.
Types of Budget?
While there are several types of budget, I’ll narrow this down to three crucial types:
- Fixed Budget: These are budgets based on a defined or expected operational capacity. It is preferably used in short-term plans. An Example would be budgeting to produce 5000 bags of pure water weekly.
- Flexible Budgets: This is a type of budget that anticipates volatility in the market. It plans for different levels of activities during the budget period.
- Cash Budgets: Cash budgets are used to plan strictly for cash inflows and outflows. It is helpful when there is an anticipated change in operational activities and control is required to keep things in check.
Budget Timelines?
Budgets can be built to address expectations of different timelines, such as monthly, quarterly, annual and even five-year budget plans. Did you draw up a budget for the year 2025?
How to build a budget document
Budgeting can be done using a variety of tools; my favorites are the google sheet or excel. You do need basic data entry and analytical skills to use these tools effectively. There are several other budgeting apps on your phone’s play store that could be your padi on this journey; examples are goodbudget, Budget Planner, Money Tracker etc.
Simply find what works for you and get started. To get started, you need to ensure that the following steps are dutifully carried out:
Have a financial goal
Before you commence your budget build up, it’s important to answer the question, “what do you want to achieve?” What you plan to achieve is what determines how your financial plan should be designed and followed through. Note that budgets are not limited to organizations only; you can build a personal financial budget in line with your financial goals. By understanding those goals, you can prepare a budget that aligns with, facilitates and supports them.
Estimate Income for the budget Period
Before you start allocating funds to budget items, you must determine potential incomes and minimum income levels per time. The basis for funds allocation could be your previous month or the previous year’s performance, or in the case of a new business, you could use your marketing plan as a basis for projections. The rule here is to be conservative in your estimation to avoid recording large budget variances.
Estimate your expenses for the budget period
After estimating your potential income for the period, the next step is to allocate those incomes to cover expenditures that should run the business or project. This cannot be effectively done, without full comprehension of all operational processes and the timelines for delivery of key budget items that could affect overall goals. Expenses can easily be classified under the fixed costs, variable expenses, and one-time expense categories. Expense projections should not be bloated, rather, aim to acquire sufficient information to help you create realistic projections.
Determine Your Budget Surplus or Deficit
Now that it looks like you are almost done with your budget preparation, it’s time to do a simple math. How much income did you project for? How much of expenses did you foresee?
If you have more than enough income to cover your expenses, you have a budget surplus; on the other hand, if your projected expenditure is more than your expected revenues, you have a budget deficit.
It is important that you build a sensitivity factor into your budget model to further accommodate potential fluctuations that the economy may present.
In our future post, we will be showing you how to analyze your budget and compute budget variances as well as sensitivity analysis.
