How to Develop a Budget for Business

The following is a more extensive answer to budgeting questions; a belief is that business owners may want to have more of a summary to this question. 

In developing and managing a budget as well, one should determine the financial restraints, resources, and goals of the position or department in the current or past holdings.  After reviewing last year’s budget and reconciling it to the past year’s expenditures, it can give the business owner good insight into what funding one needs to budget items he or she needs and at what level in the upcoming year. 

One should divide the budget’s “line items” into the following four categories:

1. Fixed Expenditures (those costs  which will not vary from month to month like salaries, rents, pre-determined contracting costs);
2. Recurrent Expenditures (those occurring costs that will vary slightly like utilities, equipment maintenance – items the owner must pay for and have a good idea what it will cost);
3. Discretionary Expenditures (costs that will occur possibly, but the funding level can change given the demand—like materials, field trips—some of the items the business owner could decide to do without or do less of if need be, and
4. Exceptional Expenditures, costs that rarely occur. Like new equipment or conference-room refinishing.  

The fixed and recurrent costs need complete coverage in the budget, whereas the other two categories can be less exact with one budget item borrowing from another if the need arises during the year. 

The annual budget should balance monthly, showing when to expect expenditures for each line item to occur. Sometimes early in the year costs are different (organization, materials, meeting support) than they are in later months, (e.g., field trips). This monthly plan will serve as the model for comparing expenditures to the budget.

Once the budget is proposed and appropriately approved, the business owner would receive both

1. The responsibility to stay within budget and
2. The authority to spend the approved funds, up to a maximum amount, above which will require up-ward approval.

A monthly reconciliation of expenditures to plan (to the budget), is best in two parts. The first part entails using the figures the accounting department supplies (which is a basis of the records kept by accounts payable, an example is, the bills paid during the month).

However, during the month, received services or materials have been for a bill that has already been (or not been) received. These amounts or expenditures should be recognized as “accruals,” incurred in the present month, but that will not be paid for until later.  Adding the (accounts payable) expenditures to the accruals for the month provides the best insight into how well the company is staying on the budgetary plan.

Controlling expenditures, on the other hand can only be done by retaining control of the authority to spend.  This authority can be delegated, that is, if the owner gives someone the written responsibility to find a contractor or purchase materials, he or she can also delegate in writing the authority to spend, usually up to a set maximum amount, budgeted funds for that designated purpose. In other words, usually, expenditures require the written approval of whoever is responsible for staying within the approved budget.


The final step in control is the monthly report to the supervisor, which outlines how the department’s expenditures plus accruals compare to the monthly budgetary plan. This reports on outlines where the largest variances are to plan, why the company was either over or under on these significant variances and what plans are in place to rectify these discrepancies in the months ahead. Such a review prevents surprises that neither the supervisor want, nor the business owner. Favorable discrepancies can provide opportunities for saving toward exceptional items, whereas recovery from negative (unfavorable) discrepancies requires careful future management of funds and activities.

Finally, as the budgetary period comes to a close, preparation for the new period’s budget should begin.  Learning from experience is a key to performing well in the future.

This is how a business owner perceives to develop and manage a budget.