Creating a feasible budget for your upcoming fiscal year

Your business needs to have a budget in order to keep your expenses under control. Everyone knows that a budget is necessary to keep spending under control and to make accurate predictions about the fiscal year's cash flow, expenses and capital spending.

There are three things that must be considered when formulating the upcoming fiscal year's budget:

1) The previous fiscal year's expenditures.
2) The upcoming year's planned capital expenditures.
3) An estimate of expected earnings, profit, and expenses.

This may seem to obvious to list, but if your business was completely steady state, and there were no changes from year to year, no expansion, no new customers, no store closures, and the earnings from year to year, then you could keep the same budget from year to year. Since this is not the case, then you need to consider the conditions that will change, but your previous year's budget is a good place to start. Then you can begin to consider the things that you anticipate will be different during the upcoming fiscal year. For example, will you have more employees in the customer service department? Are there new product lines which will require additional resources in the field, such as additional fleet vehicles? What about additional vehicle maintenance expenses due to the increased number of vehicles. Don't forget the gas, oil, insurance, tires, and other expenses that go along with it. Maybe you have decided that one of your product line's sales have gone down, and this product line will be discontinued for the coming year. You will have to have someone figure out how all of this affects all the different areas and divisions of your organization, and budget accordingly.

Whenever a business is planning on making a change to the business, such as opening a new store, hiring some new employees, purchasing some new assets, or possibly even buying out a competitor's business, then this is a capital expenditure. Just as when you are buying a home, you may be doing these capital expenditures using borrowed money. Your budget needs to reflect where the earned money is going to go, and how the expenses are going to be paid.

You need to have an estimate of what is actually going to take place for the coming year. Again, you can review what has happened the previous year, and make adjustments according to the changes in circumstances. Your organization made a certain amount of dollars last year, but this year your have three new product lines, and market research indicates that sales from these new products will add about 7% more in gross earnings. However, your accountants figure that it will take 3.7% additional funds to make delivery of these new products happen.

Of course, no one has a crystal ball to accurately predict the future. But when running a business, you need to come as close to predicting the future as possible.

If it's your first year in business, do you still need to have a budget? Yes, but you don't have the previous year's experience to know what to predict. You do have other sources of data, however. You have the cost of leasing your building, the cost of your employee's salaries, and your business plan. You can still come as close to reality as possible. After all, without a budget, your business will amuck and crash into the rocks like a ship without a lighthouse.

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Tags: budget fiscal cash flow expenses capital spending expenditures earnings profit estimate