Business budgeting process: 8 steps and best practices

The budgeting process can be lengthy and challenging. There are questions to answer, complexities to navigate, and teams to consult. As a result, budgets can easily be postponed until it's too late or abandoned altogether.

At the other extreme are overly prescriptive, downright pedantic budgets – those where every tiny expense is accounted for and managed across a suite of spreadsheets that most users struggle to understand. Whilst this is certainly better than having no budget at all, it can create considerable difficulties along the way.

Wherever you currently stand, this article will help. It sets out the essentials of the business budgeting process to ensure you're covering what's required.

It also includes best practices and principles to help you get it right, regardless of how simple or complex your budget ultimately becomes.

Because your company must have a budget. But it's up to you whether it's effective, worthwhile, or simply a waste of time.

The budgeting process

The budgeting process enables an organisation to plan and prepare its budgets for a set period. It involves reviewing past budgets, identifying and forecasting revenue for the period ahead, and assigning amounts to spend on a company's various costs.

When done well, the process involves input from senior management, your finance team, and budget managers across the organisation.

Your budget is essentially your business plan in action. You've set priorities and goals for the company over the coming year, and the budget allocates financial resources to achieving them.

The importance of business budgeting

The fundamental benefits of budgeting are clear: if the business runs out of money, it cannot survive. A clear cash flow plan that all teams can follow is therefore essential.

But beyond simply ensuring the business sustains itself, there are several compelling reasons to value your budgeting process:

• It helps to set clear targets and expectations. Your budget establishes targets for costs and revenues, which helps other teams tailor their work to achieve them.

• It's vital for funding. If you're approaching venture capital firms or banks for additional investment, they'll want to know how you'll spend it. They'll also want evidence that you've created and followed budgets in the past.

• It sets out your priorities tangibly. Your teams likely set their own deadlines and timeframes to a certain extent. The budget provides them with global guidelines, and involving them in the budgeting process makes this alignment possible earlier.

• It prevents difficult conversations. Individuals will always have exciting ideas and campaigns they want to run. Whilst this should be encouraged, your budget provides firm numbers to keep expectations realistic.

• It connects finance teams with the rest of the business. This is an integrated process that requires input from across the company. Finance will learn more about other teams' priorities and can then offer structured guidance.

Clearly, the greatest advantage is that budgets give companies enhanced control and visibility over spending.

8 key budgeting process steps

There is probably no single "right way" to create a business budget. However, to guide you through the process, here are eight important steps to follow:

1. Review the previous period

2. Calculate existing revenue

3. Set out fixed costs

4. List variable costs

5. Forecast extra spending

6. Scrutinise cash flow

7. Make business decisions

8. Communicate it clearly

Let's examine each in turn.

1. Review the previous period

Your starting point should always be to examine the existing information you have to hand. In this case, the best evidence for how your new budget should unfold is the previous one.

A few questions to consider:

• Did you spend more or less than anticipated?

• Were your assumptions about the industry and your own growth accurate?

• Were there unexpected hurdles or shortfalls, and what caused them?

• Was the budget easy to enforce? Did team members follow it?

You should do this at a high level for the entire company, and you should also encourage individual budget managers (if you have them) to do the same within their own remits.

Also critical at this stage is to consult other team leaders. As we'll see, the best budgets are collaborative, and you need to know how well the previous budget worked for everyone affected.

2. Calculate existing revenue

The most obvious starting point for any budgeting exercise is to determine how much you have to spend. This will involve accounting for costs, of course, but we'll come to these next.

At the company level, you need to identify income streams. How much money are you making gross? List your core products, their pricing, and the expected volumes for each over the coming year. Naturally, this involves some estimates and won't be perfect.

For startups: If you're not yet profitable (or don't have paying customers at all), you'll be spending investor capital or venture debt. At this stage, you need to identify the "burn rate" you're comfortable with – how much of the total investment you're able to commit for each period.

3. Set out fixed costs

Fixed costs – often called "overheads" – are those over which you have little control. Most importantly, they're not impacted by your sales; whether the business succeeds or not will not affect the amount you pay.

Fixed costs can include:

• Rent or mortgage payments for office space

• Website hosting and servers

• Employee salaries

• Insurance

• Interest on loans

• Utilities (such as electricity and internet)

Assuming you know your employee headcount for the year and have your office space and insurance arranged, you can comfortably plan for these costs. As part of this process, it's worth understanding key payroll terminology to ensure that misconceptions or inexperience don't cause problems, particularly when assessing staffing costs.

4. Add variable costs

Variable costs are usually considered discretionary expenses. As opposed to fixed costs, these are more fluid and can be adjusted.

Examples of discretionary expenses include:

• Marketing and advertising

• Corporate investments and donations

• Software subscriptions, particularly where they aren't critical to running the business

• Travel and client meetings

• Team perks

• Office décor and renovations

• Business tablets, laptops, mobile phones, and other hardware

"Discretionary" doesn't mean that these costs are frivolous or unnecessary. A business won't grow without marketing, and team perks can be a key contributor to employee retention.

However, when building a business budget, these costs must be justified more critically. And when you're in danger of exceeding your budget, variable costs are usually the first to be cut.

5. Forecast additional spending

Are there any one-off expenses on the horizon? These can include a significant merger or acquisition, consultant support to prepare for an audit, or even a special event or celebration that doesn't occur regularly.

If possible, try to set out these irregular expenses separately in your budget. You certainly need to account for them in your spending, but they won't be a core component in future years.

You might also consider a "rainy day fund". Because the only certainty is uncertainty, it's wise to have some portion of your budget set aside in case unexpected events occur and you need a safety net.

6. Scrutinise cash flow

This is where the budget analysis begins. You should now have a clear record of expected revenue and expenses, and ideally, you'll also have a record of these from the previous period.

Was your spending as expected? Did you have consistent revenue across the past year, or can you identify seasonal effects?

"Cash flow" refers to the relationship between money coming in and going out. You want to ensure that you're spending money you've budgeted for and that when income dips, you can update your expenses to match.

Look for clear indicators that certain parts of your budget might need extra attention. You want to identify the particular aspects of your business that impact the budget most heavily and be prepared to adjust accordingly.

Key questions to ask:

• Which departments consistently exceed their budgets?

• Are there predictable seasonal fluctuations in revenue or expenses?

• What is your cash runway based on current burn rate?

• Are there any concerning trends in payment delays or outstanding invoices?

7. Make business decisions

Naturally, you now need to use all the analysis and preparation you've completed. That means forming a clear spending plan for the future.

Of course, the most challenging aspect of the entire process is deciding which projects or priorities receive funding and which don't. This can be stressful, and we've included some best practices below to help. Most important is to remain consultative throughout – gather input and rely on the expertise of your skilled team members to guide you.

You'll almost certainly make updates and changes throughout the year, so it's important to rely on the data you have today and not become too bogged down in achieving perfection.

8. Communicate it clearly

The final step is to share the budget with your teams and ensure they understand what's required of them. You'll likely rely on many team leads to manage their own costs, and they need the tools and clear expectations to do this well.

Does everyone involved know how much they're allowed to spend and on what? Do they also know how to report their spending as they go?

If you can't answer "yes" to both questions, you'll likely struggle to track and measure the effectiveness of your budget adequately.

Then there's the messaging. For many governments, "budget day" is the most significant day of the year. There's a reason political leaders take the messaging so seriously. Whilst you don't need to go overboard, it makes sense to get your communication right too.

Business budgeting best practices

Now that we've set out the process, let's also consider some principles to apply along the way. Here are several excellent suggestions from industry experts.

Think assumptions before numbers

Obviously, your budget will be full of numbers and figures. However, it's often wise to start by clearly setting out what the budget is based on, built for, and how it should be interpreted.

As business consultant Hal Shelton advises: "When you picture a budget, you likely see spreadsheets with many numbers. But more important than the numbers are the assumptions that drive the calculations.

"Therefore, the first page of your budget should present these assumptions – what products or services are being sold at what prices and volumes, and what the key drivers are for expenses, such as the number of staff and locations, various marketing initiatives, etc.

"In essence, you have both an operations and finance budget, and the two are closely intertwined."

Consider your KPIs

It's vital that your budget – especially the variable costs sections – reflects the overall goals of the company. Make an effort to tie expenditure back to those priorities and track your progress as the budget unfolds.

Key Performance Indicators (KPIs) can point you in the right direction when setting a budget. KPIs can help you plan the smaller details whilst simultaneously focusing on the bigger picture. The challenge is determining which KPIs need to be considered.

Common KPIs for setting a budget plan often include:

• Operating cash flow and expenses

• Sales and marketing initiatives

• Payroll expenses

• Return on equity

• Burn rate

• Accounts payable and receivable

• Staff turnover rate

Just ensure that your KPIs are clear and can be easily measured.

Avoid these three common pitfalls

It's always helpful to have a few areas to watch out for. Even though you may already have these three factors in mind, they're worth repeating:

These are classics for good reason.

Revisit regularly

A budget is definitely not "set it and forget it". In fact, you need to review, analyse, and update your spending as the year progresses.

That's why you should schedule regular budget reviews. Starting with monthly reviews is recommended, then switching to a more comfortable schedule once you've established patterns. Monthly reviews can help you notice the flaws in your plan (which is especially important if you don't have much experience in this area) as well as understand how stable your business is.

If you notice that you don't need to make changes frequently, you could start reviewing your plan every three or six months.

You might even find that you have more available funds than you'd anticipated. You need to know this early, whilst there's still time to deploy those resources effectively.

Business budgets and spend management

At this point, you understand the fundamentals of effective business budgeting. The next step is actually implementing it for more effective company spend management.

Consider the following:

• How will you easily monitor where each payment goes?

• Do team members have to manually update a spreadsheet to keep track?

• Who has approval for specific payments, and do teams understand these rules?

For many businesses, the answers aren't entirely clear. Many organisations rely on manual processes and diligent employees to stay on top of costs.

Instead, consider implementing dedicated spend management tools. You can have debit cards with limits that match the budget and workflows that keep the appropriate budget manager in control of each payment.

Most importantly, every payment is logged automatically, eliminating the need to maintain Excel spreadsheets manually. This is company spending designed for finance teams that need control without being overbearing.

In short, it's smarter company spending. Book a demo to see how it works for your business.