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Management: Quick steps to build a proper budget for your company
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Quick steps to build a proper budget for your company

By Marwan Emile Faddoul

Managing Partner

NFG Consulting LLC


Running a business often requires owners to carefully plan and review their finances.
A few weeks ago, Lisa, the owner of a startup software company and a close friend of mine came to my office, greeted everyone, and then said: “Marwan, I need to prepare our company’s budget for the coming year, I would love to finish it within the next two weeks, and I have no idea where to start.”

WBT201511_150_Management__001Budgeting helps you balance your expenses with your income. In other words, a budget is like a dashboard in an airplane cockpit that tells the captain the status of his airplane. Among these measuring instruments, important zones are marked out: red zone (if the needle goes too high that's bad!) and green zone (that's where we want to be).

I asked Lisa to take a seat, and before proceeding with her request, I started to ask questions to better understand her situation. So I said: “Lisa, what is it that makes you feel that you need a budget? What is the benefit you are trying to achieve?” She stayed silent for a few seconds, so I proceeded: “The budget can be presented in different ways depending on the need you are looking for. A budget can be requested by current investors to know the exact amount of money they need to inject for the year to come. A budget may also be conducted to minimise cost. In some case, investors may want a budget to tell them how much money they should inject in the first year in order to maximise ROI, even if this requires spending more.”

Lisa looked at me and replied: “I want a budget, because I am worried about each department overspending, I want to use the budget as a tool to bring rampaging costs under control.” I noted her request and told Lisa: “We are going to create a budget that will allow your company to control expenses. In order to reach our objective the following steps should be implemented.

WBT201511_150_Management__003First of all, take the company as a whole and divide it into partitions. In Lisa’s case we will divide the company into departments, and product lines. The departments include the ones that help generate revenue, like the sales and marketing department, and the ones that bring support to the firm, like human resources, and the finance department. Regarding the product lines, we will simply present the different products she’s currently working on as well as the new products she will develop in the coming 12 months. Note that each product line and department has its own expenses and needs its own budget forecast.

Second of all, we build our baseline. Here we rely a lot on the company’s previous expenses. Initially we build our framework for each product line and department. If we take for example the sales department expenses, it should include: salaries (fully loaded), support functions (computer, booklet, etc.), sales training, as well as all external expenses like business trips and client gifts. After presenting all current expenses, we focus on the company’s short and medium term goals. To do that we need to sit with each head of division and acquire the main goals this division needs to achieve during the period of which you are budgeting. For example, for your sales department you might be aiming to increase your gross sales by 5%. For your administration department you might want to decrease your administrative costs as a percentage of revenue by 3 points, or might want to reduce inventories by 2% by the end of the fiscal year. Note that your budget should be ambitious but also realistic, so make sure not to map out a budget that you can’t meet, but don’t underestimate the possibilities.

Third of all, we need to develop ways to reach each department and product line objective, eventually either reduce or increase elements in your list of expenses. If we take into account the objective of the sales and administration department, how can you generate more revenue? Will you need more sales representatives? Where can you cut costs or reduce inventories?

WBT201511_150_Management__005Now, once we have the updated list of expenses that needs to be conducted to reach each division’s objective, we move to our last stage. Here we build our assumptions; since we are developing a forecasted budget, we need to create projections by adding assumptions to current data. Look hard at the assumptions you’re making. Let’s suppose you think sales will rise by 10% in the coming year if you add two more people to your unit. Explain what you’re basing that assumption on, and show a clear connection to at least one strategic goal (in this case, it’s probably to increase sales by a certain percentage). For some office supply expenses, getting the average of previous expenses and projecting it to the future with a percentage increase, could be a solution. For other expenses, like individual income tax and the company’s income tax, it is important to present them at the day payment is due. Lastly, for inventory expenses, making assumptions based on
a high or low sales season is an important factor to take into consideration. Last but not least, once you have your forecasted budget table, it is important to benchmark your work to similar companies in your industry, and see if you are implementing a logical reasoning.

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