How to Prepare a Budget for Your Organization: A Step-by-Step Guide

Creating an annual budget is one of the most important financial tasks for any organization A thoughtful, well-prepared budget provides a spending blueprint that helps ensure organizational priorities are supported, resources are allocated effectively, and goals can be met For leaders unsure of how to develop a budget, follow this step-by-step guide for a crash course on budget preparation.

Step 1: Review Previous Budgets and Actuals

The first step in preparing a new budget is to review previous budgets and actual results. Analyzing historical data helps uncover

• Spending patterns across departments and line items
• Significant variances between budgeted amounts and actual amounts
• Areas where budget estimates were inaccurate
• Trends that are increasing or decreasing costs year-over-year

Historical data reveals problem areas to improve and helps inform realistic projections. Within each department, have managers review prior budget performance and provide insights into inaccuracies.

Step 2: Gather Data on Upcoming Needs

In addition to historical data, gather information on plans, needs, and anticipated costs for the upcoming year:

• Have each department head submit budget requests detailing their mandatory and desired expenses.

• Note any new initiatives, programs, staffing changes for next year that require budget increases.

• Gather data on expected price/cost increases for inventory, supplies, software, contractors.

• Review contracts to identify upcoming renewals with higher rates.

• Factor in financing payments for longer term purchases.

• Account for any major repairs or maintenance needed.

• Build in mandatory insurance premium hikes, tax obligations, fee increases.

Collect exhaustive input now to prevent unexpected shortfalls later.

Step 3: Project Revenue

A budget balances projected expenses with realistic revenue forecasts, so predicting income is crucial.

• Review previous revenue and growth trends. Is revenue increasing linearly or exponentially?

• Note any external factors that may increase/decrease sales. Will the economy shift demand?

• Quantify the impact of marketing plans and new initiatives on revenue.

• Look at market data to estimate market share shifts.

• Have sales provide revenue projections by product line or geography.

• Consider opportunities like new markets, contracts, or funding sources.

• Be conservative in projections. Overestimating revenue creates risk.

Step 4: Make Strategic Spending Decisions

With expenses and revenue forecasted, make tough calls to align spending with organizational priorities:

• Classify expenses as mandatory, high priority, or discretionary.

• Eliminate or reduce discretionary items that don’t support core goals.

• Shift resources from lower priority items towards high impact ones.

• Find ways to meet needs through free or low-cost alternatives.

• Identify unnecessary redundancies across departments.

• Scale back uniform percentage budget increases in favor of strategic allocation.

• Challenge teams to identify potential savings in their own budgets.

Rightsize expenses based on what is truly vital for achieving organizational goals within the coming year.

Step 5: Review the Full Budget

Once a draft budget is prepared, thoroughly review it for accuracy and feasibility:

• Scrutinize large variances between prior years’ budgets and the current one. Do they make sense based on business changes?

• Ensure assumptions and projections are realistic and error-free.

• Confirm all mandated expenses are sufficiently covered.

• Check that departments have resources to reasonably accomplish objectives.

• Have department heads validate and provide input on their budget line items.

• Make sure total expenses align with the total revenue projection. Shortfalls must be addressed.

The budget review prevents faulty numbers and assumptions from creating problems mid-year.

Step 6: Obtain Approval

Most organizations require formal budget approval before finalizing:

• Present the budget to organizational leadership/board/stakeholders. Be ready to explain thinking behind key decisions and backing data.

• Be prepared to defend requests, projections, and strategic priorities in the budget.

• Incorporate feedback from approvers into budget revisions.

• Have approvers formally sign-off on the final version.

Securing buy-in creates shared understanding and commitment to budgeted priorities.

Step 7: Share Final Budget

Once the budget is approved:

• Distribute the final budget to all department heads and relevant staff.

• Communicate the underlying goals/imperatives that drove budget decisions.

• Provide clear guidance on allowable expenses under the budget.

• Note any areas where exceptions or flexibility exist.

• Establish periodic budget vs. actual reporting with department heads to monitor adherence.

Transparency on expectations, trade-offs, and variances is key for successful budget execution.

Budget Considerations

Creating an organizational budget requires weighing several key factors:

Fixed vs. Variable Costs

• Fixed costs like rent stay constant regardless of activity changes.
• Variable costs like supplies fluctuate based on the volume of work.

One-time vs. Recurring Costs

• One-time costs are single year expenses like equipment purchases.
• Recurring costs repeat annually like subscriptions, salaries.

Cost-benefit Analysis

Compare expense impact to potential revenue/benefit gain to guide smart spending.

Capacity Analysis

Consider what level of expenses operations can realistically support based on revenue constraints.

Cost per Output

Measure the total cost of key activities divided by output to identify waste and efficiency opportunities.

Cost Trends

Analyze trends in major costs each year to improve estimates and identify red flags.

Budgeting Mistakes to Avoid

When preparing an organizational budget, sidestep these common missteps:

• Not allocating enough time for careful preparation and deliberation.

• Failing to gather comprehensive input from operations teams.

• No or limited analysis of previous budgets and actual expenses.

• Assuming future budgets should align closely with past ones.

• Not thoroughly questioning and validating projections and assumptions.

• Setting budgets in a vacuum without considering broader organizational priorities and capacity.

• Viewing the budget as an inflexible, immutable document rather than a dynamic guideline.

• Failing to build in a reserve for unplanned events and expenses.

• Not communicating budgets transparently or holding teams accountable.

With thoughtful planning and analysis, an organization’s budget acts as a blueprint for achieving goals successfully amidst constraints. What steps does your organization follow to create effective budgets? What lessons have you learned from past budgeting cycles? Consistent budget vigilance pays dividends.