Budgeting is an integral aspect in monitoring and evaluating your financial success. Most business entities see the value in setting a budget. However, whether you run a small business, a major company, a not-for-profit entity or a household; you should consider creating and using a budget.
If this is your first year creating a budget; it will be a learning year. Budgets are not stagnant but must be evaluated and changed as you gain knowledge. To get started, estimate your monthly income by looking at pay stubs and/or your prior months inflows, consider any events that may affect these amounts month to month. Second, look at your standard recurring expenses such as utilities, taxes, entertainment, advertising etc. and any special expenditure that you know is forthcoming. The process of creating a budget is valuable because it causes you to set expectations and recognize events and circumstances that may impact you.
If you already have a budget from a prior year, you can either use that as a starting point and make adjustments as necessary for your expectations of the coming year or you can start clean and look forward only, (the advantage of which is that with no base line, you create without preconceived notions). You can also do a hybrid of these two approaches. A great suggestion is to start clean at least once every five years. This forces you to focus on your objectives rather than on your history. Sometimes expenses that you have always had can be eliminated, but you have carried them forward every year simply because they were “budgeted.”
You can use many platforms to budget. QuickBooks and Quicken are very convenient and wonderful for creating reports to analyze and compare your budget to actual and historical performance. These systems can be linked to your bank, investment and credit card accounts which will increase efficiency. Excel or another spreadsheet software is also an easy and affordable option that most anyone has access to. Spreadsheets allow you to create custom analysis and comparisons.
You should always include a budget to actual analysis in your system. Typically a schedule is set to review and adjust your budget monthly, quarterly and again annually.
Effective budgets require the following:
• Be realistic about your revenue and expenses
• Make sure your budget reflects your long-term goals (example: Individual - Are you planning for retirement and college? Organization - Are you putting away money for research and development?)
• Monitor your budget and amend if changes occur (changes may be economic factors, loss of a revenue stream, or for a non-profit entity loss of a major contributor or grant)
• Include detail rather than summary categories; the more detail the more valuable the analysis, (i.e. instead of a line item for all utilities include detail such as gas, oil, electric, water & sewerage etc.)
Common Errors Include:
• Failing to include all “players” in the budgeting process (i.e. all people “in the know”)
• Spreadsheet formula errors
• Forgetting items of income or expense
• Overestimating revenue
• Not adjusting for known or expected changes
• Budgeting every dollar without leaving a reserve or surplus for emergency or other contingencies.
Based on my social interactions very few individuals budget for their household; even high income and well educated people don’t seem to know where there money goes. I started budgeting when I started a family and reduced my hours at work. The biggest shocker at that time was how much money I spent every day on coffee!
For my family, it has been the most financially valuable thing I have done. We know what expenses are coming, when they are coming and how to save for them. We determine how much to allocate to emergency funds, the amount we can afford to put away for college, what is available for entertainment, and how much is available for Christmas or vacations! Eliminating or at least minimizing financial surprises takes a lot of the stress out of life; granted you can’t budget for your husband backing down your driveway and directly into your sister’s car… but that is why surplus funds are part of the plan.
For more tips on budgeting or for consultation services in setting up QuickBooks or Quicken and your budget, please do not hesitate to contact us.
If this is your first year creating a budget; it will be a learning year. Budgets are not stagnant but must be evaluated and changed as you gain knowledge. To get started, estimate your monthly income by looking at pay stubs and/or your prior months inflows, consider any events that may affect these amounts month to month. Second, look at your standard recurring expenses such as utilities, taxes, entertainment, advertising etc. and any special expenditure that you know is forthcoming. The process of creating a budget is valuable because it causes you to set expectations and recognize events and circumstances that may impact you.
If you already have a budget from a prior year, you can either use that as a starting point and make adjustments as necessary for your expectations of the coming year or you can start clean and look forward only, (the advantage of which is that with no base line, you create without preconceived notions). You can also do a hybrid of these two approaches. A great suggestion is to start clean at least once every five years. This forces you to focus on your objectives rather than on your history. Sometimes expenses that you have always had can be eliminated, but you have carried them forward every year simply because they were “budgeted.”
You can use many platforms to budget. QuickBooks and Quicken are very convenient and wonderful for creating reports to analyze and compare your budget to actual and historical performance. These systems can be linked to your bank, investment and credit card accounts which will increase efficiency. Excel or another spreadsheet software is also an easy and affordable option that most anyone has access to. Spreadsheets allow you to create custom analysis and comparisons.
You should always include a budget to actual analysis in your system. Typically a schedule is set to review and adjust your budget monthly, quarterly and again annually.
Effective budgets require the following:
• Be realistic about your revenue and expenses
• Make sure your budget reflects your long-term goals (example: Individual - Are you planning for retirement and college? Organization - Are you putting away money for research and development?)
• Monitor your budget and amend if changes occur (changes may be economic factors, loss of a revenue stream, or for a non-profit entity loss of a major contributor or grant)
• Include detail rather than summary categories; the more detail the more valuable the analysis, (i.e. instead of a line item for all utilities include detail such as gas, oil, electric, water & sewerage etc.)
Common Errors Include:
• Failing to include all “players” in the budgeting process (i.e. all people “in the know”)
• Spreadsheet formula errors
• Forgetting items of income or expense
• Overestimating revenue
• Not adjusting for known or expected changes
• Budgeting every dollar without leaving a reserve or surplus for emergency or other contingencies.
Based on my social interactions very few individuals budget for their household; even high income and well educated people don’t seem to know where there money goes. I started budgeting when I started a family and reduced my hours at work. The biggest shocker at that time was how much money I spent every day on coffee!
For my family, it has been the most financially valuable thing I have done. We know what expenses are coming, when they are coming and how to save for them. We determine how much to allocate to emergency funds, the amount we can afford to put away for college, what is available for entertainment, and how much is available for Christmas or vacations! Eliminating or at least minimizing financial surprises takes a lot of the stress out of life; granted you can’t budget for your husband backing down your driveway and directly into your sister’s car… but that is why surplus funds are part of the plan.
For more tips on budgeting or for consultation services in setting up QuickBooks or Quicken and your budget, please do not hesitate to contact us.
