How to plan a budgeting model

Planning a budgeting model helps managerial accountants and budget analysts answer several different what if questions. A budgeting model is a mathematical model that generates a profit planning budget; how your business will make the most money. Budgeting models are usually quantitative and computer based.

Why plan a budgeting model
One of the most common dangers of failing businesses is the failure to plan. Unexpected things will almost always occur; new technology can create new markets overnight. As a business owner you need to plan for the future. Implementing an operating budget and testing your budgeting figures is crucial to the success of any business.

The two most common types of budget planning models are

• Percentage Projections


• Zero-based Budgeting

Since all business needs are different you will have to use your own discretion at which budgeting model will work the best for your company's needs.

Percentage Projections
This method is probably the easiest to use. It is one where you make percentage projections about the rising costs from one year to the next. As a business you must realize that different factors that contribute to your budget will change yearly. Things such as the costs of cell phone providers, advertising and promotion costs, etc. These all fit in to the category of variable expenses. Fixed expenses such as office rent will usually remain the same until the end of the year.

Zero-based Budgeting
Zero-based budgeting operates somewhat differently than percentage projection budgeting does. When you use zero-based budgeting in your budgeting model you start with a selected point in a specific category of expenses. You then take your last year's total expenses and begin from that point. For example, if you had $50,000 in total expenses for promotion and advertising causes. If you are using zero-based budgeting you will be forced to review the entire last year's expenses; everything related to that specific advertising campaign and all promotion expenses. You would look through all expenses and see where you might be able to cut any expenses. Zero-based budgeting also forces you to take a closer look at the last year and any mistakes you may have made, and gives you a clearer vision of what can be changed for the upcoming year. Instead of increasing expenses as you might do in the percentage projections, you could find wasted areas and overhead costs that you can simply eliminate. Zero-based budgeting helps you to think outside of the box and come up with some other creative and interesting ways to budget.

Monitoring the Budget
Once you have decided which type of budgeting modeling plan you decide to use with your business one of the most important things to do next is to keep track of your money and monitor where it is going. It's all great to set up a budgeting model, but it will do little good if you do nothing with your plan. You need to monitor it at least quarterly to know if changes need to be made.

Percentage projections and zero-based budgeting are two ways on how to plan a budgeting model for your business. As all businesses are different and have different needs, you will have to determine if either of these is right for your company and then implement and plan your budgeting model accordingly.

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