Budgets are plans. They are spending plans, sales and marketing plans linked to careful projections and resource allocation.

Simple math, simple numbers
The math of the expense budget is very simple. The content takes work, but not the design of the table. It’s built on common sense and reasonable guesses, without statistical analysis, mathematical techniques, or any past data. The mathematics are also simple, sums of the rows and columns.

As you develop a budget, think of it as the part of your plan you can most easily control. Consider your plan objectives, your sales and marketing activities, and how you’ll relate your spending to your strategy. Remember as you budget that you want to prioritize your spending to match your priorities in sales and target marketing. The emphasis in your strategy should show up in your actual detailed programs. That’s your budget.

Simple expense budget

The budgeting process
A budgeting process that brings people directly into the involvement and ownership of the budget is strongly recommended. Here’s a simple step-by-step way to increase the importance of budgeting and implementation within your business.

  1. The budget preliminary meeting: Start your budgeting process with a preliminary meeting that brings your main managers together. Discuss strategy and priorities, realistic amounts, and the planning process. Distribute a simple template and ask each manager to prepare a proposed budget for his or her area. Ask the managers to create a proposal that includes monthly numbers and descriptions of the programs and activities involved.
  2. Budget development: Allow a period for managers to develop their budgets, working with the standard template. Enforce deadlines for preliminary proposal and revisions. Consolidate the proposed budgets into a single budget table that lists all of the proposed programs and activities. In most cases the total of all proposals will be 2-3 times the real amount your company can spend. Share that consolidated table with all managers. Share with them the difference between proposed budgets and actual spending limits, and ask them to think about it.
  3. Budget discussion: Bring your managers back together with the budget table. Ideally you set up a conference room with a projector and the consolidated proposed budget table. Then you go through the budget, item by item, and pare it down to a realistic amount. Your managers will be together in a group, so they will have to defend different proposals, and as they do they will build up their personal commitments and their ownership of budget items and programs. They will explain why one program is more valuable than another, they will argue about relative value, and they will increase the level of peer-group commitment.

When this process works well, you have a more accurate, more realistic, and more useful budget. You also have a high level of commitment from your managers, who are now motivated to implement the budget as well as possible.

The budget will be part of profit and loss
With the way business numbers work, your expense budget will eventually become part of your Profit and Loss table. If you’re using a personal computer with spreadsheet or LivePlan® business planning software you should expect to see automatic linking so the expense budget is absorbed into the Profit and Loss table.

This illustration shows a simple profit and loss, with the expense budget showing as the expenses portion of the larger statement.

Standard profit and loss statement

This first example is a simple budget that doesn’t divide expenses into categories. This is ideal for smaller businesses with only a few employees.

Detailed profit and loss statement
By the time you have workgroups and a slightly larger business, however, you’ll probably end up dividing expenses into categories such as sales and marketing expenses, administrative expenses, and other expenses. This next example shows how that might look when it’s brought into the income

Regardless of which budget style you choose, you make very important choices as you plan your profit and loss. This is where you plan your expenses. You are estimating expenditures across the business, from rent and overhead to marketing expenses such as advertising, sales commissions, and public relations. Decisions you make here are as important as the mathematics are simple. Your sum of expenses ultimately determines your company’s profitability. This is the business plan equivalent to budgeting, as you set your sights on the levels of expenditures you expect your company will need.

Tim BerryTim Berry

Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.