It’s mid-September and most would think that it’s too soon to think about planning for next year. However, this is the perfect time to start preparing, because budgeting can be a challenging task as there are many components to finalize. Let’s face it: most of us do not enjoy budgeting, but it is a very important tool to use in both our professional and personal lives.

Simply put, a budget is a summary of all income and expenses for a given period of time. A budget will help you set and manage your expectations. If those expectations are not being met, you may be facing a problem area. Once this potential problem is identified, you can then investigate further and determine the actual cause of the issue. For example, if you are spending more money on one area of expenses, it could be a major unforeseen event has occurred, the prices of the goods and services used has increased beyond expectations, or because you are not utilizing the goods and services as efficiently as you expected. Each of these potential areas is much more easily identifiable once compared to a budgeted amount.

To create a budget, you need to start with the top line: revenue. How much income do you foresee making in a given time frame? Do you typically make more money in some periods versus others? Do you see an increase in revenue due to increased marketing efforts or a decrease in revenue due to the loss of key customers? These are all examples of questions that you need to be prepared to answer. Remember to be realistic with your expectations. Everyone would love to make more money and therefore budget higher revenues, but an exaggerated budget is of no use to you in the future.

The next step to creating a budget is to look at your expenses. Some expenses will be very easy to budget as they are fixed amounts paid monthly i.e. rent & utilities. Other expenses will be directly related to your revenue. These are costs like direct materials and direct labor. These are costs that are incurred to provide the good or service that you are selling. The more that you sell, the more of these costs you will incur. Other expenses will be discretionary depending on the circumstances i.e. meals and entertainment & subscriptions. All of these expenses combined when subtracted from revenue, will provide you with a budgeted net income amount. This is your overall expectation for a given period of time.

The goal of creating a budget is not to be 100% correct about the outcomes of the future. The goal of creating a budget is to help you compare actual results to your beginning expectations. There is a reason as to why your initial expectations did not match the actual outcome. This could be planned or something that you were unaware of happening. Either way, it holds you accountable for managing your financial situation.

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