How to Prepare Annual Budgets After tax season
Budgeting 101: Numbers Don’t Lie
Companies and organizations can do themselves a favour by preparing annual budgets after a tax review. Reflecting on the previous year and planning for the next year is necessary, but can be difficult, for any organization (a family, small or large business) without a formal budget in place. But people are often deterred by what they perceive as perhaps a difficult process. Or, sometimes people and businesses are content just doing things as they have always done on “the back of an envelope” with no formal look at finances.
But that’s not the most cost effective or efficient way to run a business. How can you know what you have spent or need to spend without knowing what you are making, and squaring the two sides of the ledger? Some of the reasons to prepare a budget, no matter how large your organization is, include: giving you the real picture of your company, encouraging effective ways to deal with money issues, helping avoid surprises and maintain fiscal control, and strengthening your understanding of your goals.
First, it is important to determine and tally all income sources, which could include sales, investments, earnings or other areas. This can be done a month-to-month basis. Second and third, determine fixed and then variable costs, respectively. Fixed costs are costs that don’t change from month-to-month, like office rent, utilities or salaries, for example. Variable costs are just that – variable, and subject to change. This could be purchases that are needed over the course of a month or even a year, for example, commissions, advertising and travel expenses.
It’s also a good idea to estimate “one-time spends” like the purchase of equipment or large office supplies (e.g. computers). Part of the exercise of creating budgets, and looking at expenses and income, is developing a way to estimate expenses. You can be conservative or not but be as accurate as possible when looking at expenses and income. This often means, “guessing high” for expenses and “guessing low” for income.
The next step, of course, is putting all of that together. In some cases, people and/or organizations are not equipped to handle the necessary processes for budgeting. Hiring or using the services of a Chief Financial Officer or some accounting professional would be advisable in those circumstances.
Maintaining control of finances and expenses is the most important factor in creating a budget. Organizations should be as accurate and up-to-date with their finances not only for their own success but also to show funders/investors how things are working (or not). Knowing your numbers helps provide clear guidelines about future spending, and ultimately helps with the future growth of the business.