Creating a budget plan: step-by-step instructions and valuable tips

What is meant by a budget plan?

The budget plan determines the financial resources available in a year and their distribution across organisational units, projects, and business activities. Typically, it defines the expected expenses and revenues with a planning horizon of one year. The budget plan is intended to support the overarching corporate goals as effectively as possible, but no more should be spent than is economically justifiable.

Why should companies create a budget plan?

The budget plan enables the company to compare the intended and the actual financial situation of the company over the course of the year. Do expectations of business development align with reality? A look at the financial plan shows you whether you are on the right track and how your liquidity is doing.

The different types of budget plans

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

The distribution of budgets can also be structured differently: in the top-down method, management decides on the distribution to smaller organisational units, whereas in the bottom-up method, sub-budgets are first decided within smaller teams or units and then a total budget is established. Finally, a distinction is made between input and output-oriented budgeting. The former bases the budget plan on past experiences, while the latter focuses on the set goals.

Creating a budget plan in 8 steps

1. Look back at the past: Are there significant changes in the company, goals, or resource planning compared to the previous business period? If there are major changes, last year's figures are only partially suitable as a guide for budget planning; otherwise, past periods are a good reference point.
2. Revenue forecast: Determine your revenue, among other things, based on previous financial years and corporate goals.
3. Listing fixed costs: Calculate your overheads – this includes, among other things, salaries, rent, insurance, benefits, and loan payments.
4. Gathering 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 the core business. Such additional costs can include, for example, hosting a company event or hiring an external consulting firm.
6. Check cash flow: After making a revenue and expense forecast, it is worthwhile to review the cash flow from the previous business period. Were there any unusual items or seasonal effects that also need to be considered when planning the budget for the next year?
7. Make decisions and allocate budgets: To make informed decisions about the allocation of budgets to projects and teams, the overarching strategic goals of your company must be clear. In addition to the goals, revenue share and competitive orientation can also serve as a guide for allocation.
8. Communication is key: Don't make decisions behind closed doors, but involve your employees in the planning phase, as your decisions need to be supported by the team. When presenting the budget plan, communicate clear responsibilities and expectations to the employees. Communication should always include time and space for an open exchange of ideas and feedback.

Tips for effective and realistic budget plans

• The right timing: Allow sufficient time. November is typically a good time to create the budget plan, as there is still enough time available for planning, but not too much uncertainty about the upcoming financial year.
• Stay realistic: Initial enthusiasm for a new project, excessive optimism, and unrealistic wishful thinking will only come back to bite you later. Therefore, base your planning on figures from the previous year, as well as research and, if necessary, external data.
• 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 figures for your teams.
• Flexibility and room for manoeuvre: Give those responsible in budget planning sufficient leeway to make 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 swift and dynamic action can be taken – this makes it essential to review the forecasts in the budget plan during the year and to create a target vs. actual comparison.
• Appropriate tools and accounting software: Use smart tools and software to make the budget plan as efficient as possible and then check the financial situation. With Tidely, you can easily create a target vs. actual comparison of your financial situation and see at a glance whether your company is acting according to the budget plan or whether adjustments need to be made. Try Tidely for free and create your budget plan now, or let one of our employees support you in a free consultation.