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Creating a Budget: Traditional Budgeting Sucks! Plan for Growth

Creating a budget is one of those tasks that seem to be on everyone’s to-do list, but rarely gets checked off. That’s sad for the budget. Seriously, though, budgets are amazing when done right.

Traditional budgeting has you looking at the past 12 months and calculating a monthly average for each expense and income stream. They suggest glancing through your expenses to see if you want to adjust some of them. Now you get a budget for the new year that is the same as last year. It keeps you in the same mindset. No growth or planning for the future. Worse yet, imagine you didn’t perform all that well last year and now you are working of a budget that will get you those same results.

That’s why traditional budgeting sucks!

We’ve changed the process to match the mindset you should have when creating a budget. This framework works for both business and personal budgets with some slight changes in the details that we’ll get to.

  1. Forecast Income and Expenses
  2. Historical Income and Expenses
  3. Regular Review

 

STEP 1:  Forecast Income and Expenses

 

The first step in budgeting is actually forecasting and predicting what you are trying to accomplish. What’s your revenue goal? What new expenses will be needed to achieve that revenue goal? Do you have any new products or projects coming down the pipeline? What new income and expenses will you expect from those?

Put those numbers into your budgeting spreadsheet. I guess now is a good time to tell you that you’ll need a spreadsheet to create a budget, in case you didn’t already know that. I sometimes forget things like that because we’re accountants and live in spreadsheets and normal people like you probably would rather never look at one. Regardless, a basic spreadsheet, broken out by month and following the same outline as your profit and loss statement, is the easiest way to build a budget.

 

STEP 2:  Historical Income and Expenses

 

Now you can look back at your historical income. Compare to your forecasting revenue goals and add to each month where needed. Be careful not to average everything out because you want realistic numbers each month to account for any seasonality or typical revenue highs and lows in your industry.

Historical expenses are next. No more averaging them out then plug in and go. For this you’ll do an analysis of each expense. Yes, every single one.

You are looking for Productive vs. Non-Productive. Does it help you bring on new clients or keep current clients? If not, then cut it. We also have a list of 9 Expense Analysis Questions to ask for each expense. Take the time to do this right. You’ll likely find some things to cut which bring immediate savings and it will also get you thinking about your expenses differently which will save you even more in the long run.

Once you’ve completed the analysis add the adjusted historical expenses to your budget spreadsheet. Be sure to add them to any forecasted expenses so your budget reflects your goals.

 

STEP 3:  Regular Review

 

The beauty and magic of your budget comes when you regularly compare your actual numbers to your budget. Do this monthly. If there’s a difference, then ask why. The real magic comes when you follow up on those questions and take action to improve.

 

QUESTIONS  –lead to->  ACTIONS

 

Business vs Personal

 

Making a personal budget follows the same outline…

Look to the future first

Then look back

And review it regularly

 

When forecasting for your personal budget, the income should be fairly straight forward. For expenses think through any planned vacations or one-time large purchases you are planning on. If your income was comfortable last year, then use it. When going over your personal historical expenses you’re going to ask yourself a different question. Does it increase your freedom and does that freedom increase your happiness?

A word of warning when it comes to creating a personal budget. Be more conservative! Your personal budget should not be as tight as your business budget. Give your personal life some more wiggle room. What naturally happens when your income increases, your lifestyle and therefore expenses increase with it. Your cash needs boundaries to minimize that phenomenon.

Profit First is the best system for managing cash with boundaries and works with both business and personal budgets. Go to our Free Wealth Resource Page to get the tools and resources you need to implement Profit First for yourself along with the expense analysis questions, tons of tax saving strategies, plus more.

 

 

If you’d rather watch or listen to content then check out the video below.

 

Check out…

InciteFUL Profit Podcast

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