You may be required to develop and submit a budget proposal for your own department or division. When you are determining how to create your budget, there are three common practices:

1. Take last year’s budget and, depending on orders or your subjective view of the year to come, either add to it or cut from it to arrive at a satisfactory budget for the new year. This is a rather random method, since it is not informed by what you hope to achieve in the coming year as far as the growth of your organisation.
2. Use the coming year’s predicted sales as the basis for the budget. In this case, businesses may have already determined that your division receives a set percentage of the sales goal for the year. However, doing so means that the organisation is relatively confident that its sales predictions are correct. If you are basing them on last year, and last year was a slow year, then you might end up with less funds than you need in order to keep up with the sales that actually occur. If last year was a banner year, then you might end up with more budgeted costs than actual sales. In either case, the accurate prediction of your future sales is important for using this method.
3. The third common method is called ‘blank-page’ budgeting. This is usually considered to be the best approach by budget professionals because it allows you to start from scratch and use your identified objectives and priorities as the basis for the budget you create. In this scenario, you look at the coming year’s objectives and then you examine what you will need in your budget in order to achieve those objectives.

No matter what method you choose, you will probably have to propose your budget to management in order to get approval. It is a good idea to give management a few options. So you should create a minimum budget, a target budget, and a stretch budget.

Minimum Budget

This is the bare essentials, rock-bottom amount that you can see being required to achieve the lowest level of your objectives. It’s important that you truly define what you will be able to do with this budget, and more importantly, what you will NOT be able to do. This makes it clear to management what level of risk they are taking if they only agree to fund your budget at the minimum level.

Target Budget

This is the level of a budget that you feel is the bare minimum in order to fully support the established objectives for the coming year. You are saying with this budget that you can commit to helping achieve the stated objectives as long as you have this amount of funding. Again, you need to clearly delineate what you would be able to provide at this level. Make it realistic, achievable, and as accurate as possible because if you get the full target budget, you will be held to what you have promised.

Stretch Budget

In this funding scenario, you are itemizing what additional level of objectives you can meet if you have this higher level of budget. Don’t be surprised if you do not receive this level of budgeting – it’s entirely possible that the rest of the organization simply couldn’t handle a higher level of performance than what the stated objectives will provide. For example, if you stated that you could increase sales by 10% with your stretch budget, that would mean that everyone involved in supporting the sales team would need to be able to handle that additional 10% of customers, as would customer service, shipping and delivery, or any other departments that interact with customers.

Reading the Budget

A budget provides information on planned expenses and revenues over a given time period, usually one year. As you read the budget, you will see that:

• It is broken into categories corresponding to your Chart of Accounts. Each account will be represented by a line or lines on the budget, which is why they are called “budget line items.”
• There is a column for the amounts that were budgeted for each line item
• There is a column for the amounts that were actually spent (or earned) for each line item
• It might show the budget deviation in another column
• It might show the previous years’ budget information for each line item

Budget deviation is important because it helps you to determine how accurate your budgeting actually was. The larger the deviation, the more you need to reevaluate your budget. For example, if you expected to earn R10,000 in one month but you only earned R8,000, you might have to readjust your budget for future months. Especially if significant deviation continues to occur.