Filip Stefanovic
18 jun 2020
We all know that when somebody mentions budget, headache starts!
Many questions appear, such as:
How to deal with those numbers?
How to create them out of thin air?
Where should I start to look for information?
Did I cover all of the aspects?
Did I miss something?
In this article I will try to help you out to initiate that process by providing you with a check list and action items to do so. Also I'm going to try and help to define certain things before you start creating or drawing a budget.
Many people are struggling how to start, what to include, how to evaluate and etc. However in reality some principles need to be taken into an account.
Creating a budget from scratch or to formulate that as "zero-based budgeting" term, it all depends from project to project and from purpose to final outcome. Zero-based budgeting can be considered as a process where something is scratched from the start, however this can be used as a different term in larger corps. Like creation and analysis of costs from start to end of each fiscal year. But more on that, some other time. Let's get back to things that matters, before we go to details.
It is actually rather simple! It doesn't matter if you are working for giant corporation or a small start-up, essentials are covered in both instances. Base knowledge has to be there and from that point on you will evolve and continue to push forward. You will improve, reevaluate, iterate, change, add, remove and finally it will be a presentable estimation! For every project, budget is considered as one of the most important factors in developing some project from start to finish. Many parties need to be involved that can help you out in gathering info or rather "realistic" estimation. Even if it's not realistic, collect information as it is and when you put pieces together you will see what makes sense and what not.
What is a budget?
Budget represents a statement of expected expenditure/income that you or your company have been allocated for limited amount of time in the future to achieve certain goal. Budget can be allocated for certain headings and areas of the business in different ratio.
The budget by itself, represents one of the most important tools for planning, controlling and allocation. It is used frequently as a performance indicator if something is on the right path or not (Which is not always true if you haven't explained at which pace the expenditure fly-out from business and for which purposes).
However, it is used to explain how the goals would be achieved and at the end if it pays out for the organization in a long run or short run. Majority of companies increasingly involve finance department in creation of budgets and they expect that managers, outside of finance department, have a basic financial knowledge to understand what kind of things are taken into account and to claim some financial accountability down the line.
That's where the stress come into play!
Drawing up a budget requires a basic numerical knowledge, not a rocket science degree. But not only that! It requires people with great soft skills to negotiate and persuade certain stakeholders to acquire more money or more time (important factor). Also, one of the most important aspects of skills that you need for budgeting is listening! A lot of people forget about this skill, which is rather important in all aspects of the business as well as life.
This is not a mechanical process! Budgeting is considered as a rather dynamic path where iterations are happening in a large extent. If you are responsible for creating a budget, you need to understand:
How the business works?
Who are the decision makers?
What are the goals (Long-term/Short-term)
How the market works? - Therefore you are not tricked when estimating something. Even if you don't know, ask your friends/colleagues and people who understand that. Gather people in the room.
How to present and who is the audience?
Checklist for creating a budget
My advice for all of you, who doesn't know where to start is to start asking questions to people around you and yourself. Try to realize what problem you are trying to solve and how to get there. Start basic and complexity will come.
I will provide a checklist for you, that can help you to kick it off:
Identify the projects/corporation key objectives or long-term plans.
Which plans out of those are impacting your project or purpose?
What are the factors which are limiting growth?
What are the factors which are key to success?
From monetary perspective what is "Coming In" and what is "Coming out"
(Income and Expenses)
Determine your fixed costs and variable costs based on analysis.
Think through your costs carefully.
How to convert fixed to variable costs?
Decide how to draw up the budget.
There are various techniques (Incremental, resource, zero-based)
Are there any costs from previous projects or year that you can utilize as a reference point?
Collect your information in an organized way!
Draw up a 1st version of the budget!
Build Pessimistic/Realistic/Optimistic scenario
Build budget control boundaries and frameworks
Ask important questions!
Present the budget!
What should you avoid when you are creating a budget:
Creating a budget structure without involving people.
Not asking the right questions.
Being shy when it comes to research
Being over-optimistic without valid evidence
Deciding on budget with low amount of information to support that.
Remember! Measure Twice, Cut Once!
If you have any questions, doubts or you believe I missed something important, let's have a discussion about it! Put your opinion in comments or send me a message! I hope I helped. Peace out!
Best,
Filip Stefanovic