Projecting budget spending

You may feel strange the first few times you work on your budget. You may feel as if you could make up anything. It's in the future. Anything's possible, right?

Not exactly. The more thoroughly you have examined your historical performance, the more accuracy you will have in projecting the future. For example, if you have been in business for four years and your company is still growing, most likely your revenues will be no lower than last year's total. Now you have a floor for your projection. If your revenues appear to increase by a sedate 5 percent per year, chances are, barring any major changes to your operations, they will increase by 5 percent next year. Simply multiple last year's revenues by 1.05, and you will have your projected revenues.

On the expense side, you should now have a good handle on which expenses stay the same and which ones increase with changes in revenues (or other costs). Once you have projected the revenue, you can project the same percentage increase in those costs (if they move in tandem).

Fill in the rest of the expense items. Once you have completed the preliminary budget, check it one more time against the last 12 months. Does it still look reasonable? If not, rework it until you're comfortable that it makes sense.

Changes to the Company's Operations

Now that you are comfortable that the budget for the next 12 months makes sense in comparison with the last 12, you need to review your management operating plan. It maps out the changes you want to make: change in premises, increase in sales efforts, more radio ads, etc. Your management operating plan also projects the financial impact these changes will likely have on your business.

The next step is to review the preliminary budget and adjust it for the changes that you know will happen in the next 12 months (called fine tuning). Are you renting new warehouse space next July? Make sure the budget reflects the extra lease payments. Are you hiring a new salesperson? Make sure both the salary and the projected increase in revenue are in the budget.

By now, you will have your road map for the next year. The budget will become part of your cash-flow projections, but when compared to your actual performance, can provide you with a wealth of information.