Budget planning for next year: a simple six step process

Budget planning for next year does not need a big model or a week of meetings. Small firms can do it in six steps: look back, set targets, test scenarios, name owners, set review dates, and write it down. Start in November, while the year is still open and the numbers are fresh.

Step 1: Review what actually happened

Pull your real numbers for this year before you plan anything. Use actuals, not memory. List revenue by product or service, then list costs in two groups. Fixed costs stay the same each month, such as rent, salaries and software. Variable costs rise and fall with sales, such as materials, delivery and commissions.

Compare each line with what you planned at the start of the year. Mark the lines that were off by more than ten percent. For each one, write one sentence on why. A late customer, a price change and a lost client are all useful answers. Without the reason, the number teaches you nothing.

Also look at cash, not just profit. A firm can show a profit and still run short of cash if customers pay late. Note the months when your bank balance was thin. Those months will come back next year unless you plan for them.

Step 2: Set targets you can defend

Now pick a revenue target and a cost target for the new year. Start from this year's actuals, then add only what you can explain. If you plan to grow sales by 15 percent, say where it comes from. It could be a new hire in sales, a price rise, a repeat customer, or a new service.

Keep the list short. Three to five targets are enough for most small firms. Good examples are total revenue, gross margin, the number of active customers, and the cash you want in the bank at year end. Each target needs a number and a date. "Grow sales" is a wish. "Reach a set monthly revenue by June" is a target.

Check each target against your capacity. If your team is already full, more sales may need more staff. Add that cost to the budget now, not later.

Step 3: Build three scenarios

One forecast will be wrong. Three forecasts give you a range. Build a base case, a weak case and a strong case.

Base case: sales grow at the pace you think is most likely.
Weak case: sales come in about 15 to 20 percent below the base case.
Strong case: sales come in above the base case, and you decide what extra spending that would justify.

For each case, work out monthly cash in and cash out. Look for the month where the balance is lowest. If the weak case runs out of cash, you now know early. You can arrange a credit line, delay a purchase, or agree shorter payment terms with customers while you still have choices.

Write down a trigger for each cut. For example, "If sales are below the weak case for two months in a row, we pause new hiring." A trigger turns a hard decision into a rule you agreed on in advance.

Step 4: Give every line an owner

A budget with no owners is just a spreadsheet. Give each major line one named person. That person explains the number, watches it each month, and raises a flag when it drifts. One owner per line works better than a team owning it together, because shared lines tend to belong to nobody.

In a small firm, the owner may hold several lines. That is fine. What matters is that each line has one name beside it. Someone should also be responsible for the basics of money control: customer invoices and payments, supplier bills, available cash, bank reconciliation and payroll.

Tell owners how much they may overspend without asking. A simple rule is any change above a set amount, or above ten percent of the line, goes to the founder or finance lead first.

Note: this section describes common small business practice. No outside statistics are used.

Step 5: Set review dates now

Put the review dates in the calendar before the year starts. A monthly check of 30 to 45 minutes is enough for most small firms. Compare actual figures with the budget, ask owners to explain big gaps, and note what you will do about them.

Hold a deeper review each quarter. Ask three questions. Are the targets still right? Which scenario are we tracking? Do we need to change the plan? If the answer to the last question is yes, change it. A budget is a working tool, and updating it is a sign of good management, not failure.

Note: this section describes common small business practice. No outside statistics are used.

Step 6: Write it on one page

Finish with a one page summary that anyone on the team can read in five minutes. Include the targets, the three scenarios in one small table, the owner of each major line, the review dates, and the triggers for cuts. Share it with the team in the first week of the new year.

A short plan gets used. A long one gets filed. If a number does not change a decision, leave it out.

Before you close the file, run a quick check. Do the targets match the costs? Does the weak case still keep the lights on? Does every line have an owner? Are the review dates booked? If you can say yes to all four, your budget planning for next year is done, and you can spend the next weeks on running the business instead of guessing.

Note: worked examples in this article use round, made up percentages for illustration.