Step 1: Gather Historical Data and Review Past Budgets
Before you start setting new targets, look at what happened last year. Pull your profit and loss statement, expense reports and any notes on unexpected changes. Compare what you planned to spend with what you actually spent.
Look for gaps or surprises – did revenue dip in the second quarter? Did software costs jump unexpectedly? Noticing these patterns early helps you avoid repeating the same mistakes and plan better for the year ahead.
Pro tip: If spreadsheets are slowing you down, try Mercur’s budgeting software and make automatic calculations.
Step 2: Set Objectives and Scope
Once the data is in hand, clarify the goals of the budget and who will be involved. This usually means defining top-line goals (such as revenue growth or cost savings targets) and scoping which departments or projects the budget will cover.
In practice, finance leaders will meet with senior management and department heads to align on priorities. For instance, if the company aims to grow by 10%, sales and marketing budgets might need extra resources.
Step 3: Forecast Revenues and Costs
With objectives set, the next step is to project revenues and estimate costs for the budget period. Use the historical baseline as a guide: apply realistic growth rates to past sales figures, and update them based on current contracts, market trends or economic outlook.
Do the same for costs: list fixed expenses (such as rent, utilities, permanent staff salaries) and variable expenses (like raw materials or sales commissions) and adjust these for inflation, planned hires or efficiency improvements.
Finance teams often create multiple scenarios – best, base and worst case. Incorporating scenario planning prepares you for risks and keeps the budget flexible.
Step 4: Allocate and Build the Budget
Now comes the detailed budgeting: allocate the projected funds across cost centres, projects and departments. This means deciding exactly how much each team can spend on salaries, marketing, equipment, etc., and ensuring total outlays match the revenue forecast (or allowed deficit).
In practice, you may find the first draft unbalanced (expenses exceeding revenues, for example), which means revisiting assumptions or reallocating funds until the plan is coherent and aligned with strategy.
Step 5: Monitor and Adjust
Once the budget is approved, the real work begins. Track actual income and expenses each month and compare them to your budget using proven management reporting practices. If something is off, like sales coming in lower or costs rising unexpectedly, dig into why.
The goal isn’t just to catch problems but to fix them early. Maybe a department needs to cut back, or maybe you need to update your forecasts. Schedule monthly check-ins so budget reviews become routine, not a surprise.