Budget planning: find out the best way to create

If you don't know yet, budget planning is when we estimate the revenue that will come, the production costs and the expenses necessary to run the company. In other words, how much you have to sell and spend to keep your business healthy .

The budget organizes this vision in numbers, showing its financial and economic performance of the future and the past. With it, keep track of your company's progress, making it easier to take action to improve results.

A methodology, on the other hand, consists of previously aligned methods and processes that help carry out an activity or project. It's like a script that will organize your actions.

The reconciliation of budget planning with the methodology is the way to direct the steps and actions in an orderly and progressive way, ensuring the complete execution of the company budget . This is therefore the best way to create a budget plan .

Knowing him very well, we dedicate this text to a detailed procedure in creating a budget planning through the methodology. From now on, you will follow every step in executing an excellent corporate budget !

Let's go to the steps!

Financial modeling: understand how everything works

Financial modeling is the first step and has a very important weight. Here, you understand how your business is financially organized: how is your business chart of accounts , how is the cost center built, what are the sales channels, how data is collected and how it is possible to extract it from your ERP (if necessary).

The goal is to design the entire financial flow and how the documentation, transactions and how to organize it work. This is the way to "tidy up the house" and look at your finances from an overview and an overview.

Main objective: where does your company want to go?

The main focus (also known as OMTM) is the center where the other passages rotate. And not surprisingly, all the other steps use the goal as a parameter for decision making. Because once defined, the goal will guide the actions of the company as a whole .

The main goal should be set after an analysis of your company. This goal must have indicators to measure it; it must also have a period to reach (months or years). See an example of the main goal:

Main objective : to reach net profit of $ 100 thousand by December

Indicator 1 : gross billing by placement

Indicator 2 : average monthly ticket

Indicator 3 : percentage of cancellations

In the example above, we are clear on what the goal is, how far it should be reached and some indicators that help measure it. From this point on, we know which budget planning will help to achieve: $ 100,000 net profits. With that defined, let's move on to the next step: budget planning itself.

Budget planning: how to reach the main objective

So far you have understood what budget planning is, why financial modeling exists and the importance of having a primary guiding goal. You already understand all this, but you still need to go deeper into budget planning. After all, this is the strategy that will allow your company to reach its main goal .

Also, let's go to the steps that make up budget planning.

Revenue budget

In the revenue budget you need to project all the items planned for your Cash Flow . That is, how many of your products (or services) do you plan to sell in the next three, six or twelve months? This step is very important and requires the help of the sales manager, since it is necessary to use the current production capacity of the sector as a basis.

In summary, the recipes are:

Sales of products or services;

Sale of a property

Remember the main goal of $ 100,000 in December? Therefore, when planning your revenue budget, it is important that year-end sales are sufficient to achieve those goals.

Reinforcement: all budgets contained in the planning will focus on achieving the main objective.

Budget for sales deductions

With the planned revenue, you will know how much you expect to sell next month, for example. From this information it is already possible to project the inevitable sales deductions.

Some sales deductions are:

taxes;

Returns and cancellations;

Maritime transport;

Commissions.

Deductions are discounts on each product and service marketed. Therefore, if your company plans to bill 10 thousand in sales, deductions must be applied in addition to gross revenue.

Budget of production costs

The production cost budget is the planning of all the costs necessary to produce a product or sell a product or service.

Production costs are classified according to your company's activities. For example the CPV (Cost of goods sold), which is the classification for companies that sell products. CMV (Cost of Goods Sold) to companies that sell goods, generally on the market. and CSV (Cost of services sold), for companies that market services.

Some examples of costs are:

Raw material;

Contract instruments;

Inputs for production;

Budget of staff and expenses

Operating expenses are the necessary expenses even in the absence of a sale (as opposed to costs). They are associated with fixed costs because they occur throughout the month. Personnel expenses must also be considered in this budget.

Examples of personnel costs:

wages;

benefits;

Health plan

Expense examples:

rent;

water;

light;

management fees

Scenario simulation: possible paths in the same direction

After planning your budget, it's time to have it simulate possible scenarios . A scenario simulation It is a tool that, based on its planning, "versions" of this scenario are created, considering the variables that can interfere with its planning.

Take a look at some sample scenarios:

Basic scenario

The baseline scenario is your realistic scenario. That is, it is the budget planning in which everything will go as planned (with the exception of deviations, which are common in each budget) and the goal will be achieved.

Pessimistic scenario

Unlike the bottom line, the pessimist considers internal market issues that can affect his financial performance. What if the dollar goes up? What happens if the demand decreases? Considering these factors, action plans are created to combat them . Ah, it is important to remember that even in the pessimistic scenario (as in the optimistic one) the main objective must be achieved.

Optimistic scenario

And if all goes well very right? In the optimistic scenario, it is considered a positive economic environment for your company. Here, the goal is achieved with leisure and action plans are created to exploit opportunities in a positive scenario.

From the basic planning, numerous scenarios can be created. This is one of the most efficient ways to prepare for the market in advance.

Tracking of results with reports and indicators

After completing all the previous steps, you get to the budget monitoring phase. And monitoring, in addition to planning, are ongoing processes. Because we know that any planning, whatever it is, tends to have detours halfway.

In this way, follow-up is the phase in which we periodically look at the DRE and analyze the expected and implemented. How much did we earn in the month and what was planned? Did variable costs stay as expected or were they higher (or lower)?

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Budget review: is it time to change the path?

It is only from the follow-up that the need for a budget review is seen. The review changes the path of the company because, if it is realized that the main objective will not be achieved, it must be changed.

At this point, we have to think: have we changed the target or increased the deadline to reach it?

Conclusion

The passages used in the text come from the treasure methodology which has been widely tested and validated. For more information on how to apply it to your business, speak to a consultant .

And if you got here, congratulations! Now he already knows a lot about budget planning . With the information you get here, you already have enough to put your knowledge to good use.