How to Prepare Annual Budget for a Company
When it comes to owning a business, the way you measure success is by determining how much money you make. In an ideal situation, you would always have money coming in from the sales of your products and/or services. However, in reality, that’s not how it works. Your company has expenses it has to pay.
From paying employees to bills to purchasing raw materials, there are a lot of overhead costs when you own a business. To ensure that you have the funds to make these payments and still turn a profit, you need to have a budget. That may have you wondering how to prepare annual budget for a company.
Learning how to prepare budget for a company may seem daunting, but having a financial plan in place is essential when it comes to ensuring that your business has the funds it needs to get through difficult times (and there will be).
When it comes to learning how to prepare an annual budget for a company, we’ll walk you through each step of the process.
How to Prepare Annual Budget for a Company
When learning about the budgeting process for a company, there are essentially five steps you have to undertake, and these include the following:
Step 1: Decide How to Prepare Your Budget
The first thing you need to do when learning how to prepare annual budget for a company is to decide how you’re going to prepare that budget. Essentially, there are two methods you can choose from:
- Use the budget from the previous year
- Create a green-field budget
If you decide to create an annual budget based on the previous year, you’ll need to take last year’s budget and predict what will be different in the upcoming year. This might include the cost of materials to produce your goods, your employees’ salaries (have you added more people to your company or given anyone raises?), or perhaps increases in your rent or other bills.
Once you figure out what amounts are different, you’ll then need to plug those figures into the upcoming year’s budget. When figuring out the corporate budgeting process, that can help you predict how much profit you’ll make in the next year.
A green-field budget is a budgeting process for a company that is developed from scratch. You don’t have any previous budgets and numbers to look at, so you have to estimate the upcoming costs on your own.
This corporate budgeting process is a lot harder to complete since you don’t have a foundation to work with. Keep in mind that “harder” doesn’t mean “impossible,” and you can still learn how to prepare annual budget for a company when starting with nothing.
Step 1a: Creating a Green-Field Budget
If you decide to put together a green-field budget, one of the easiest ways to achieve this goal is to break your company into sections. Depending on the type of business you own, a how to prepare budget for a company example might include the following categories:
These would be the materials necessary to support your business. Some of the items included in this category might be tools that are needed (computers, phones, forklifts, cars, trucks, etc.). You might also have personnel included in this category, including consultants or outside vendors you use to keep your business up and running.
When it comes to maintenance, these are also expenses that are necessary to keep your business running, but they aren’t the same as supplies. These might include payments you make to outside professionals, such as IT people who set up your computer network and company website. Maybe it’s the mechanic you pay to keep your company vehicles up and running.
For operations, these are the costs that you have to pay that directly impact your business. These might include items such as rent for an office building or retail space, your employees’ wages, monthly bills (electricity, trash, business insurance, etc.) and others.
Money to Reserves
It’s always a good idea to put some money into reserves for any unexpected expenses that might arise. Making sure to put money away on a frequent basis could be the difference between you staying in business when sales slump or having to close your doors.
Remember that the categories you pick when it comes to your green-field budget will depend on your company. These are just examples of ways you can break your categories down, but you need to do what’s best for your business.
Step 2: Estimate Operating Costs for the Year
Every year, your business is going to have recurring costs, when it comes to a how to prepare budget for a company example, these might include things like:
- Utility payments
- And more
Some of these may stay the same, while others may change. When it comes to your annual budget preparation, you’ll need to predict how much you’ll spend on each of these items. These will be your “fixed costs.”
In addition to fixed costs, when budgeting for companies, you’ll also need to predict what your “variable costs” will be. These would include items that fluctuate from month to month. Depending on your business, variable costs could include vehicle or office machine maintenance (if one of these items breaks down) or shipping costs for the items you sell.
Remember: your goal isn’t to know exactly how much each of these things cost. Unless you have a crystal ball or can see into the future, there’s no way to accurately do this. However, you want to make a realistic prediction so that you have a better idea of how much money you’ll need to keep your business running.
Step 3: Estimate Operating Revenues
When it comes to learning how to prepare annual budget for a company, not only do you need to consider how much money you’ll have going out, but you need to think about how much money you’ll have coming in. The money you expect to get from your customers will help you get through the corporate budgeting process.
Again, you can’t know for sure how much money you’ll get, but you can make an educated guess. If you have the previous year’s budget, look at those numbers and predict what the next year will look like. For a green-field budget, you’ll have to make a determination about how much money you’ll think is coming in.
Step 4: Determine Contributions to Reserves
As mentioned earlier, when budgeting for the year, it’s in your best interest to make sure you put money into reserves. You always need a cushion to fall back on should something unexpected happen.
To determine how much money you should be squirreling away, you might consider breaking it down into categories:
- Operation reserve – these funds would be used for unexpected costs associated with operational expenses, such as an increase in rent, more employees, etc.
- Emergency reserve – if something awful happens that damages your business, such as a broken water pipe or a fire or maybe even a lawsuit, having emergency money can help offset these costs and ensure you don’t go out of business.
- Capital reserve – this is money you put away to upgrade our business to keep it viable. This might include moving to a larger office/retail space, creating a better website, getting more products to sell, etc.
When it comes to asking how to prepare annual budget for a company and determining how much to contribute to your reserves, you might think about doing a percentage of your annual budget.
You can also think about how much a worst-case scenario in each category might cost, then put money away to reach that goal. The best-case scenario is that you never actually have to use that money, but you have it if you need it.
Step 5: Determine Net Revenue for the Year
The final step in the budget planning process is to determine your net revenue. This is a prediction about how much money your business will make throughout the year.
To find this amount, you’ll need to subtract your expenses and contributions to reserves from the revenues you expect to receive. Again, keep in mind that these are predictions, not what you’ll actually get.
Even though these are estimates, your final number should still be positive. If it’s not, you’ll need to go back through your budget and figure out where you can “trim the fat.” This might include finding a place with cheaper rent, reducing your contributions to reserves, and so forth.
How to Prepare Budget for a Company in Excel
When asking how to prepare annual budget for a company, there are tools you can use to help you get through the process, including spreadsheets. If you’re wondering how to prepare budget for a company in Excel, you’ll want to follow these steps:
Step 1: Open a Blank Spreadsheet
Depending on how your computer is set up, you might have Excel pinned to your taskbar, or you may need to go into your menu to find it. Look for a green box with a smaller box attached that has a white X in it.
Step 2: Title the Spreadsheet
In the first row, add a title to your spreadsheet. You might consider calling it “Annual Budget for [Company Name] for [Year].”
Step 3: Add Headers
In the columns under the first row, you’ll want to add some categories and headers. These might include:
The information you include in the columns will be specific to your business. The categories we listed are just for illustration; change these as you see fit.
You can also use some of the categories we talked about earlier in this article, including wages, insurance, operating costs, maintenance, reserves, etc.
Step 4: Turn Your Sheet into a Table
To turn your sheet into a table, you’ll need to do the following:
- Highlight the cells you want to include
- Click the Insert tab at the top of the page
- From the drop-down menu, click on “Tables”; a new dialogue box will open
- If your table has headers you want included, make sure to check the box
- Click “OK”
You now have a table in your Excel sheet.
Step 5: Add Formulas
Like everything else, when learning how to prepare annual budget for a company, the formulas you add to your spreadsheet will be unique to your business, but some you might consider include:
- A date formula in the “Date” column
- A running total formula for the “Balance” column
- A drop-down list for your categories
In addition to knowing what formulas to add, it’s also helpful if you know the easiest way to add them. Some of the shortcuts you might want to figure out include:
- Pivot tables
- The $ sign
- How to insert multiple rows and columns
- 3D Sum
Should you discover that creating a spreadsheet from scratch in Excel isn’t your thing, there are templates that you can use instead. These already have the basic information included, so all you have to do is plug in your numbers.
Ensuring Your Business Is a Success
Being successful in business means making a profit year after year. To ensure you know how much money is coming in and going out, you need to put together a budget. If you’re wondering how to prepare annual budget for a company, follow these five steps:
- Decide How to Prepare Your Budget
- Estimate Operating Costs for the Year
- Estimate Operating Revenues
- Determine Contributions to Reserves
- Determine Net Revenue for the Year
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