An annual budget is an essential financial plan for a company’s expenditure for the coming fiscal year. Company owners can use this plan not only to calculate their yearly budget but also to determine when to file tax forms, get audited, and close the books. Creating an annual budget involves balancing your company’s revenue with its expenses using past trends and realistic revenue expectations so that you can predict your fiscal needs for the year.
Preparing an annual budget is important for several reasons:
- It sharpens your understanding of company goals
- It allows you to portray the real picture of what is happening in your company
- It provides effective ways of dealing with money issues
- It fills the need for required information
- It facilitates discussion of the finances
- It enables you to avoid surprises and gives you full control
Preparing for Your Annual Budget
Before you begin your forecast for revenue and expenditure, you will need to gather income and expense data from previous fiscal periods. Collecting this information will help you estimate the future budgeting process based on past trends. For example, if you are creating a quarterly budget, then look back at your previous two or three quarterly financial statements. This way you can create a custom budget based on your desired timeframe.
Once you have the trend data, you can use it to create a baseline projection for future revenue and expenditure. For example, if your revenue has increased at an average of 25 percent each quarter, for the past six quarters, increase your baseline projection for the next quarter by 25 percent.
What Are the Elements of an Annual Budget?
For your budget to be effective, you should break down income and anticipated expenses either by month or by quarter. Which one you choose will depend on the size of your company. The budget should incorporate separate accounts for each of your business’ departments. These departmental mini-budgets should also be broken down by month or quarter.
There are a number of factors that you need to consider when putting together your company’s annual budget. These components are essential if you want to create an accurate and up-to-date annual budget and maintain control over finances. The budget needs to include:
- Projected expenses: This is the amount of money which you expect to spend during the fiscal year. Projected expenses can be broken down into categories such as salaries, office expenses, etc. There are several steps to make a correct estimate of your projected expenses. The first step is to make a list of your company’s necessities for the fiscal year. You can look back at trends from past years to help you stay accurate. Next, make a list of expenses you will require to conduct typical business activities. You should also list any of your company’s fiscal obligations. Finally, list the items you would like to purchase for your company but may not be able to afford during the coming year. Add up all these expenses to provide a guideline for your budget.
- Projected income: This is the amount of money you expect your company to make during the coming fiscal year. Projected income includes revenue and any income which may be coming from grants, contracts, funding sources, memberships, and sales. There are several steps you will need to take to reach your projected income. The first step is to estimate the amount you expect to accrue from sales revenue. Next, estimate the amount you expect from fees which you charge for services. Finally, estimate the figures you expect from fundraising, investments, and memberships. Adding up these figures will give you your projected income for the year.
- Interaction of expenses and income: This aspect of the annual budget entails keeping track of the money that was given for a specific activity, item, or position by a funder. It is important to build in any restrictions that might come with the money so that nothing comes as a surprise later.
- Adjustments to reflect reality: You must remember to factor in funds for emergency situations and unexpected necessary purchases. Also, don’t forget that your annual budget will begin as an estimate, so you will need to adjust it throughout the year to make it more accurate. In order to do so, lay out your figures in a useful format so you can easily compare the total expenses with the total income. Stick to your expenditure budget as much as possible because a budget surplus may not show up until the end of the fiscal year.
Additions for Non-profit Organizations
Typically, non-profit organizations are required to undergo an annual audit. The audit must be conducted by a Certified Public Accountant (CPA) that will examine your organization’s financial records to ensure that they are accurate. The CPA will also work with you to solve any problems or correct any mistakes. Providing that the records are in good order and there is nothing illegal, the CPA will prepare a financial statement for the organization based on the records that have been examined. The statement certifies that the non-profit’s accounts are in order and that professional accounting practices (or as we recommend, GAAP) have been followed.
Tips for Cutting Your Budget
In certain circumstances, you may wish to cut your company’s budget. If so, it’s important that you do it in an organized way. Here are some considerations to help you decide on what you can and can’t cut:
- Make sure you don’t cut services or items that are necessary for running your business.
- Are you able to reduce the number of physical items you need to run a department?
- Do you need to consider making staff cutbacks? If this is the case, could you reduce staff hours, ask members of staff to increase their share of their fringe benefits, or is it necessary to lay off some members of the staff?
Don’t Dismiss an Annual Budget
Annual budgets are essential for evaluating your company’s performance over the course of a fiscal year. Because you will be comparing and raking revenues and expenditure and comparing these aspects to what was budgeted, you can make sure that your company is sticking to its original plans. Budgeting also presents a great opportunity for you to identify issues and opportunities.
For example, if sales in the first quarter turn out to be lower than projected, you will be able to see where you can cut expenses late in the financial year in order to remain profitable. Equally, if you introduce a new product which turns out to be more profitable than you anticipated, you will be able to see exactly where you have additional revenue, and you can revise your budget and perhaps use the extra money to increase production.
It’s clear to see why annual budgeting is important for your business. You can make sure that you are utilizing your entire annual budget optimally by employing the best budget management practices. This is the only way your company will truly grow and continue to be successful.