Steps for Creating a Budget

1. Analyze your company's overall strategy. What's the forecast for the global and national economy? What are current industry trends and forecasts? What are your company's strengths, weaknesses, opportunities, and threats? How do your company's culture and values affect its approach to specific financial decisions?

2. If your company does top-down budgeting, start with the targets given to you by senior management. If your company does bottom-up budgeting, create these targets yourself. What will best meet the needs of your unit? List the 3–5 most important goals for your unit—and put an expected completion date on each of them.

3. Articulate your assumptions. What ongoing and/or one-time "events" do you want to see happen during the upcoming budget period? Assess the revenue and cost implications of each event. Check the previous year's budget for ideas you can refine.

4. Quantify your assumptions. Assign specific revenue and cost numbers to each of the events you've planned for your unit. Get input from other team members about estimates for particular line items. Check trade publications for industry averages to use as benchmarks. Using a spreadsheet program, put the numbers in an abbreviated income statement template. Instead of including key assumptions and drivers in formulas, put them into separate cells so that they can be easily understood by others—and easily changed if the need arises. While you're at it, set up your spreadsheet so that you're ready for the tracking phase: create places for actuals, account numbers, charge codes. Present the numbers in the proper format. If the company has specific policies about presenting a budget, make sure your budget complies with the format. Include the level of detail that is appropriate to your position in the company.

5. Take a step back. Do the numbers add up? Does the budget meet the goals you and your senior management have established? What does the bottom line look like? How does it compare to last year? Can you provide documentation for your assumptions? Is the budget defensible? What questions are most likely to arise when senior management looks at your budget? How will you answer them? What adjustments or concessions would be easiest to make if your budget is not approved? Write an executive summary that includes key points and numbers, as well as a précis of the major initiatives planned for your unit in the coming year.