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Budgeting- an exercise that typically helps manage your finances. We all know the importance of budgets but yet only few people take it seriously and devise a mechanism to formulate a budget be it in home or offices. Budgeting is not just about limiting expenses, it’s about gaining clarity and control over your finances. Whether at home or in business, a budget shows you what’s essential, what’s optional, and where your money is really going.
- It helps prioritize must-haves vs nice-to-haves.
- It makes future planning easier.
- It prevents cash bottlenecks and surprises.
Think of it as your financial map: without it, you’re navigating blind.
How to Make Budgets for an Organization?
Step 1: Categorize Expenses by Priority
Every organization has different types of costs. Start by listing all expenses, then break them down into three priority buckets:
P1- Must-Haves: Fixed costs you cannot avoid (rent, electricity, salaries, compliance)
P2- Important: Needed for smooth functioning and growth, but can be optimized or adjusted.
P3- Nice-to-Haves: Non-essential; can be cut, reduced, or postponed.
This exercise instantly shows where your money truly needs to go first.
Step 2: Categorize by Frequency
Next, classify your expenses based on when they occur:
Monthly: Salaries, utilities, subscriptions.
Quarterly/Half-Yearly: Audits, software licenses, maintenance.
Annual: Insurance, major renewals
One-time: Office renovation, equipment purchase.
This helps you anticipate recurring costs and plan your cash flow better.
Step 3: Build Your Budget Approach
There are two common ways to start:
- Revenue-First Approach:
If you have predictable revenues (via sales funnel or past performance), start with that. Then, allocate expenses based on historical trends and expected growth. - Expense-First Approach:
If revenue visibility is unclear, first fix your expense limits (based on P1, P2, P3) and then set a revenue target you must achieve to cover them.
Choose whichever matches your business model.
Step 4: Create a Profit & Loss (P&L) Format
Now bring everything together in a P&L statement.
- Add expense categories in detail (employee costs, benefits, raw materials, hosting, marketing, etc.).
- Include a column for last year’s average monthly expense to compare and spot trends.
- Build calculations for EBITDA, EBIT, Tax, and PAT so you can see your net outcomes clearly.
Pro tip: Always maintain a monthly P&L to catch deviations early.
Step 5: Forecast & Project Expenses
Once your P&L is ready, move into expense projections.
- Start with your monthly average expenses and apply a percentage increase month-on-month to account for inflation and rising costs.
- For employee-related expenses, plan ahead—decide how many people you will hire, when they will join, and account for both one-time (onboarding, equipment) and recurring costs (salary, benefits).
- Extend this approach to all expenses where you have visibility on units and pricing. This ensures clarity on why expenses increase and by how much.
- Don’t forget to plan for occasional big-ticket expenses such as year-end events or ad-hoc initiatives. Setting limits for these helps you manage small adjustments while staying prepared for larger outflows.
This step ensures you set realistic targets, track deviations, and remain financially prepared.
Step 6: Track New Expenses
- List down all new expenses by category. This helps confirm that the additional budget you’ve allocated stays within your set limits.
Step 7: Other Key Notes
- Revenue Projections: Revenue is as critical as expenses, but in many businesses it’s hard to project with accuracy. You can either base it on historical growth trends (% increase) or, if you have a sales funnel, build it from there. Be cautious not to exaggerate revenue forecasts.
- Finance Costs: Create a debt schedule to plan your loans and estimate monthly EMIs. This will help you track repayment obligations and avoid surprises.
- Depreciation & Non-Cash Items: While budgeting typically focuses on cash flows, remember that depreciation and other non-cash expenses are still important in your final accounts. Always keep a buffer to cover such costs even if they don’t show up in your operating budget.