If you don't know it yet, budget planning is when we estimate the revenue that will come in, the production costs, and the expenses needed to keep the business running. In other words, how much you need to sell and spend to keep your business healthy.
The budget organizes this vision into numbers, showing its financial and economic performance of the future and the past. With it, you 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 to perform a task or project. It is like a script that will organize your actions.
Reconciling budget planning with methodology is the way to direct your steps and actions in an orderly and progressive manner, ensuring the complete execution of business budget. This is therefore the best way to create budget planning.
Knowing this very well, we dedicate this text to being a step-by-step in creating budget planning through methodology. From now on, you will follow each step in the execution of a business budget Excellent!
Let's go to the steps!
Financial Modeling: Understanding How Everything Works
Financial modeling is the first step and carries a very important weight. Here, you understand how your business is financially organized: how is your business chart of accounts, how the cost center is built, what the sales channels are, how the data is collected, and how you can extract it from your ERP (if necessary).
The goal is to draw the entire financial flow and how the documentation, transactions and how to organize it all work. This is the way to "tidy up the house" and look at your finances from an overview and overview.
Main goal: Where does your business want to go?
The main objective (also known as OMTM) is the center where the other steps revolve around. And not by chance, all other steps use the objective as a parameter for decision making. Because once defined, the objective will guide the actions of the company as a whole.
The main objective should be set after an analysis of your company. This objective must have indicators to measure it; it must also have a period to be reached (months or years). Check out an example of the main objective:
Main goal: reach $ 100 thousand net profit by December
1 indicator: gross billing by placement
2 indicator: average monthly ticket
3 indicator: percentage of cancellations
In the example above, we are clear what the objective is, how far it should be achieved, and some indicators that help measure it. From this point forward, we know what budget planning will help achieve: $ 100 thousand net profit. With that defined, we move to the next step: the budget planning in itself.
Budget planning: How to reach the main goal
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 deep into budget planning. After all, this is the strategy that will make your company reach the main goal.
In addition, let's go to the steps that make up budget planning.
In the revenue budget you must project all planned entries for your cash flow. That is, how much of your products (or services) do you expect to sell over the next three, six, or twelve months? This step is very important and demands the help of the sales manager, because it is necessary to use as base the current productive capacity of the sector.
In summary, the recipes are:
- Product or service sales;
- Sale of a property
Remember the main goal of $ 100 thousand in December? So when planning your revenue budget, it's important that year-end sales are enough to meet those goals.
Reinforcing: All budgets contained in the planning will focus on achieving the main goal.
Budget for sales deductions
With planned revenues, you'll 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:
- Returns and cancellations;
Deductions are discounts on top of each product and service marketed. Therefore, if your company plans to invoice 10 thousand in sales, you must apply deductions on top of gross revenue.
Production cost budget
The production cost budget is the planning of all costs required to produce a product or sell a commodity 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, usually in commerce. AND CSV (Cost of Services Sold), for companies that market services.
Some cost examples are:
- Contracted tools;
- Inputs for production;
Personnel and Expense Budget
Operating expenses are the expenses required even when there is no sale (as opposed to costs). They are associated with fixed expenses because they happen all month long. In this budget you should also consider personnel expenses.
Examples of personnel expenses:
- Health plan
Examples of Expenses:
Scenario Simulation: Possible Paths in the Same Direction
After planning the budget, it is time to simulate possible scenarios. To scenario simulation It is an instrument that, based on its planning, “versions” of this scenario are created, considering variables that may interfere with its planning.
Check out some example scenarios:
The base scenario is your realistic scenario. That is, it is the budget planning where everything will go as planned (except for deviations, which are common in every budget) and the goal will be reached.
Unlike the bottom line, the pessimist considers internal market issues that may affect his financial performance. What if the dollar goes up? What if demand decreases? Considering these factors, they are created action plans to combat them. Ah, it is important to remember that even in the pessimistic scenario (as in the optimistic one) the main goal must be achieved.
And if all goes very right? In the optimistic scenario, it is considered a positive economic context for your company. Here, the goal is met with time off and action plans are created to take advantage of opportunities in a positive scenario.
From the base planning, you can create numerous scenarios. This is one of the most efficient ways to prepare in advance for the market.
Tracking results with reports and indicators
After all previous steps are completed, you arrive at the budget tracking step. And monitoring, as well as planning, are ongoing processes. Because we know that any planning, whatever it may be, tends to have midway deviations.
In this way, follow-up is the stage where we periodically look at the DRE and we analyze the planned and accomplished. How much did we earn in the month and what was planned? Did the variable expenses remain as expected or were they higher (or lower)?
The vision of a DRE for budget tracking goes something like this:
Thus, you can analyze the financial performance achieved in December, for example, and compare with what was actually planned. If the plan was to reach R $ 100 thousand of net income in December and, in the realization, was reached only R $ 80 thousand, we have the clear view that the goal was not met.
And by looking at the DRE over the months, you can identify the performance that caused the goal not to be met. Fewer sales than planned? Or, in the end, could not invest more in marketing?
recommended reading: Budget does not accompany ... So, what to do?
Budget review: Is it time to change the route?
It is only from follow-up that the need for a budget review is seen. The review changes the company's route because if it is realized that the main goal will not be achieved, it needs to be changed.
At this point, we need to think: have we changed the goal or increased the deadline to reach it?
The steps used in the text are from the widely tested and validated Treasy Methodology. To learn more about how you can apply it to your business, talk to a consultant.
And if you got here, congratulations! Now you already knows a lot about budget planning. With the information you get here, you already have enough to put your knowledge to work.