We've found that annual budgeting exercises are one of the least understood tasks for the new department manager. It's not something that's generally taught, and often learned through trial by fire before gaining entry into the inner financial sanctum. Even if the calculation methods are provided, the negotiation process remains a mystery. It does not need to be such a daunting task.
Here are some tips for the first budgeting activity, forecasting the annual expense budget:
Expense Budget Forecasting
1. Get a copy of last year's budget and each month's actual results. Study it; it's your starting point for all that follows.
2. Use last year's actuals for the entire 12 months or the latest 3 month's, whichever is more representative of the business. Then calculate a monthly average base number for each line item.
3. Identify the factors that drive each line item. For example, does the expenditure rise or fall with the customer base, new sales, headcount, network expansion, special projects, or inflation?
4. Get the forecasted growth for each of these factors from your sister departments. Based on their forecast, grow your budget amounts per month accordingly.
5. Identify those line items you can eliminate or reduce. Volunteer at least some cost savings up front.
6. Identify any large variances from month-to-month or year-to-year, and provide back-up justification.
For a copy of a sample department budget model, please sign our Guestbook, and request a copy of the "Budget Tips #1 Template."
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