With the end of the financial year not too far away, now is the time of the year to start planning for the preparation of the budget.

Some organisations don’t spend a lot of time preparing a budget but by having a well prepared  budget they improve the financial management and decision making for the operation of the organisation.

Of course, preparing a budget means taking into account the inevitable increases in the cost of all your overheads.  A mistake made by a lot of organisations when preparing the budget is to essentially increase each figure by a set percentage such as, for example, 5% or by the inflation rate of around 3%.  In some cases a combination of percentage increases may be used but without proper review and consideration this can be the same as taking a guess.

A far more effective way to prepare a budget which adds value is to review each item that you are budgeting for to determine how it may change for the following year.  This can easily be done by reviewing the current year’s figures and examining the variations that exist between the budgeted and actual figure.  By understanding why the variation has occurred it will help to determine the budget figure for the following year.

By taking a bit more time to analyse the current budget variations it will allow you to identify the hits and losses that have occurred during the year and they can then be factored into the budget for the following year. This not only adds value to the budget but allows the board and management to have better financial control in relation to key decisions and the viability of the organisation.

The next post on the importance of reconciliations can help with the budget preparation process.