Structuring the budget - Setting up the 12-Month Budget

The steps to setting up a 12-month budget are straightforward:

1. Prepare (or print off) an income statement for the past 12 months. It doesn't matter at what point in your fiscal year you begin this process. You will always be looking 12 months in the past and 12 months in the future. Any 12-month window will encompass a full operating cycle, regardless of the month with which you begin. Evaluate the revenue and expense categories. Do they give you enough information about your cost structure? For example, if you have an expense line called advertising and promotion, does that tell you enough about where you are spending your advertising dollars, or would a finer breakdown be helpful? You might make sub-categories of advertising and promotion, such as print ads, radio spots, mailings, or brochure printing. In some cases, further breakdown won't give you any more information than you already have.

If you want to adjust your categories, do it now. If you are breaking out pieces of categories, make sure that the past 12 months are broken out the same way. Then you can compare the past 12 months to future periods.

2. Once your categories are structured the way you want to see them, prepare a monthly comparative income statement for the past 12 months. If you are working manually, doing so may take some time, but if you are on a computerized system, the monthly comparative income statement should be one of the available reports. You want to look over the last 12 months to get a better understanding of historical performance, to see the revenue and expense trends in the business. For example, it may surprise you to find out that your office supplies account fluctuates in almost perfect lockstep with your revenues. You may not notice this relationship until you perform this review. Would the behavior of your expenses be good information to have when you prepare your 12-month budget? Of course it would!

Look at your monthly revenues. Do they stay relatively the same from month to month? Do they show an upward trend? Or are they more cyclical, spiking during your peak sales season and tapering off after that? Knowing your revenue trends helps you predict what the revenues will be next year.

3. Set up the budget spreadsheet if you are working manually. Most computer software programs allow you to input budget numbers so that you can always compare actual to budget performance. Use the same categories that you have developed for the income statement. You will need columns for each of the next 12 months and a total column at the end. In your rows, make total lines for revenues, expenses, and net income, much like you have on your income statement.