Definition: what is a line item budget?
A line item budget groups together certain categories of company spending. The budget may be broken down by business unit (marketing, sales, product), expense account (payroll, office costs, travel & entertainment), or other relevant category.
As well as separating costs into budget categories (see below), a line item budget should include data from the previous year and a projection for the year to come. Good budget templates therefore include three columns, with line items set out for each.
Previous year's expenses
Show the actual amount spent for item class in the previous financial year. This gives a clear reference point for projections.
Perhaps the most difficult step in the budgeting process is to project and allocate expenses for the quarter or year ahead. Your line item budget should set out what your company intends to spend for each, based on your goals and the data you have available.
As the fiscal period unfolds, it's vital to track expenses and monitor the amount of budget spent. Obviously, you want to ensure you don't exceed the allotted budget and cause the company financial issues. But the funds were allocated for a reason, and avoiding spending altogether will likely leave you short on your goals.
Common line item budget categories
The specific items in your budget will depend on your company's industry, structure, and goals. But as a starting point, most businesses require most of the following (included in our downloadable budget template):
Rent: permanent office space, co-working, work from home allowances
Utilities: internet, water, and electricity
Payroll: annual salaries, commissions, benefits, fringe benefits, and equity allocations (where appropriate)
Business travel: airfares, trains, taxis, accommodation, meal allowances, local travel, and incidentals
Marketing & advertising: agency costs, advertising, web servers, design, printed materials
Office costs: furniture, office supplies, stationery
Training: conferences, seminars, internal experts
Direct vs indirect costs
You may also choose to differentiate broadly between direct and indirect costs. Here's a quick definition of each.
Direct costs are expenditures that go towards producing a product or service. These include materials, supply chain, and most employee salaries. Companies monitor these costs to calculate the profit margin on goods sold. If your direct costs go up, your profit margin decreases.
These are business expenses that don't corollate directly with the production of a good or service. Examples include office space, utilities, employee perks or fringe benefits, incidentals, and more. Your indirect cost rate also impacts the company's overall profits, but not necessarily the profit margin and unit cost for goods and services sold.
How to create a line item budget
Building a successful line item budget is relatively simple, but that doesn't make it easy. It requires input and engagement from different business units and managers, which can be hard to get.
And good budgets also reflect actual spending from the prior year, which not every budget manager has readily available.
Here's how to create your line item budget:
Download our budget template
Set out your budget categories or line items (as explained above)
Fill out the previous year's total expenditure for each cost type
For a generalized budget, simply project the coming year's total project costs for each cost type
For a more detailed projection, visit each budget category's dedicated tab, and list the specific projects and costs. This will then update the main budget sheet.
As the period progresses, update the actual spend for each cost type.
As a rule, the more up-to-date your budget remains, the more useful it will be. If you wait until the end of the year to track what you've spent, your ability to react is very limited.
If you can update the budget each quarter or even monthly, you can make quick adjustments and get more impact from these funds as the year unfolds.
Track budgets automatically
Tracking company spending in real time can feel like a full-time job. Thankfully, we now have tools and technology to do all the tedious, repetitive work.
This Microsoft Excel template is a good start. But modern finance teams have smart business budgeting software which update automatically with each transaction. This lets them focus on analysis and creating more accurate forecasts, rather than on copying data into spreadsheets.
How to craft a budget narrative
When creating a budget proposal or financial report, consider the overall story you want it to tell. Is the goal to identify areas to save money, compare departments and evaluate their efficiency, or appeal to executives or investors to grant budget for new projects?
Your budget narrative should first be reflected in the budget summary. This gives the reader a quick overview of what the data tells them. A new year budget, for example, might show that the previous year was unpredictable and led to over spending. A clear narrative tells department leaders that their new year budget has been reduced, with an explanation of why.
Why line item budgets make sense
Line budgets show the reader - in a simple glance - how company funds are spent compared with both projections and the past. Small business leaders can quickly identify areas of opportunity or excess funds which could be better deployed.
It's also particularly valuable for companies wishing to employ bottom-up budgeting. This type of budgeting uses up-to-date, accurate spend data rather than top-down projections. You line item budget does include projections, but you should also keep it updated. This way, you can reference past performance at any time and ensure that you're on the right track.
Get started right away with our sample budget template.