Creating a budget plan: A step-by-step guide and valuable tips

What is a budget plan?

The budget plan determines the financial resources available for a year and their distribution across organizational units, projects, and business activities. It generally defines expected expenses and income with a planning horizon of one year. The budget plan should always support the overarching corporate goals as effectively as possible, while ensuring that spending does not exceed what is economically justifiable.

Why should companies create a budget plan?

The budget plan allows the company to compare the intended and actual financial situation of the company throughout the year. Do expectations regarding business development align with reality? A look at the financial plan shows you whether you are on the right track and what your liquidity status is.

The different types of budget plans

Budget plans can fulfill different strategic requirements depending on the need. Operational budget plans cover a short-term planning horizon of one month to one year, while strategic budget plans enable long-term planning of up to 10 years.

The distribution of budgets can also be structured in different ways: with the top-down method, management decides on the distribution to smaller organizational units, while with the bottom-up method, sub-budgets are first decided in smaller teams or units before a total budget is set. Finally, a distinction is made between input-oriented and output-oriented budgeting. In the former, the budget plan is based on past experience; in the latter, it is based on set goals.

Creating a budget plan in 8 steps

1. Look at the past: Are there significant changes in the company, its goals, or resource planning compared to the last fiscal period? In the case of major changes, previous year's figures are only of limited use as a guide for budget planning; otherwise, past periods are a good reference point.
2. Forecast income: Determine your income based on, among other things, past fiscal years and corporate goals.
3. List fixed costs: Calculate your overhead—this includes salaries, rent, insurance, utilities, and loan payments.
4. Compile variable costs: Variable costs include investments, marketing expenses, travel costs, expenses for materials and office equipment, subscriptions, and costs for freelancers. These costs can be reduced quickly and flexibly in an emergency.
5. Consider additional costs: Identify one-off major items that are not part of core business. Such additional costs could include, for example, hosting a company party or hiring an external consulting firm.
6. Check cash flow: After you have created a forecast of income and expenses, it is worth taking a look at the cash flow of the past fiscal period. Were there any extraordinary items or seasonal effects that also need to be taken into account when planning the budget for the next year?
7. Make decisions and distribute budgets: To make informed decisions about allocating budgets to projects and teams, your company's overarching strategic goals must be clear. In addition to goals, revenue share and competitive orientation can also serve as a guide for allocation.
8. Communication is key: Do not make decisions in isolation; involve your employees in the planning phase, because ultimately, your decisions must be supported by the team. When presenting the budget plan, communicate clear responsibilities and expectations to the employees. Communication should also always provide time and space for an open exchange of ideas and feedback.

Tips for effective and realistic budget plans

• The right timing: Allow enough time. Experience shows that November is a good time to create the budget plan, as there is still enough time for planning, but not too much uncertainty about the coming fiscal year.
• Stay realistic: Initial euphoria about a new project, excessive optimism, and unrealistic wishful thinking will only come back to haunt you later. Therefore, use figures from the previous year as well as research and, if necessary, external data when planning.
• Measurability and clear responsibilities: Involve the right teams in the planning process and define business-relevant, SMART (Specific, Measurable, Achievable, Relevant, Time-bound) goals and key performance indicators for your teams.
• Flexibility and room for maneuver: Give those responsible in budget planning reasonable leeway for their own decisions so they can react flexibly to developments. Likewise, as many different influencing factors and scenarios as possible should be incorporated into the initial planning so that action can be taken quickly and dynamically—for this, it is essential to review the forecasts in the budget plan throughout the year and perform a target-actual comparison.

• Suitable tools and accounting software: Use smart tools and software to make your budget planning as efficient as possible and to monitor your financial situation. With Tidely, you can easily create a budget-to-actual comparison and see at a glance whether your company is operating according to plan or if adjustments are needed. Try Tidely for free and create your budget plan now, or book a free consultation with one of our team members for support.