Preparing Your 2021 Budget
The countdown is on.
With just under two months left until the end of the year, now is the perfect time to start preparing your budget for 2021.
For some, planning a budget can seem like a daunting task. But trust us—it’s much better to be prepared than caught off-guard with expenses.
If you’re looking for tips on how to prepare a budget for 2021, here’s our guide to get you started.
1. USE ACTUAL ESTIMATES WHENEVER POSSIBLE
You might find yourself giving estimates and “ballpark” numbers when building a budget. Although this will help speed up the process, the final budget will likely be far less accurate. Whenever possible, you’ll want to use real numbers. If you are in a position where you do need to guess, make sure to guess high. If you’re estimating income, however, you’ll want to guess low.
Making more conservative estimates will help you plan a more realistic budget that you can stick with throughout the year.
2. START WITH THE NECESSITIES
For most companies, there is a given number of “necessary” expenses. This most commonly includes things like:
Salaries and wages
Rent or mortgage payments for the business’s space
Utilities (heat, electricity)
Phone services
Internet
Insurance
There might be other items related to your specific business practices that should be added to the list. If you do a quick review of your monthly subscriptions, you’ll likely find certain items that are crucial to your business operating expenses.
3. COMPARE TOTAL EXPENSES WITH TOTAL INCOME
In order for any budget to really serve its rightful purpose, you’ll need to compare total expenses with total income. If you find that your projected expenses are somewhat equal to your projected income, you have a balanced budget. If you find that you’re expenses are significantly (and yes, we mean significantly!) lower than your income, you’ll have a budget surplus. In the event that your expenses are projected might higher than your estimated income, you have a budget deficit.
If you estimate that expenses will surpass income, you’ll need to think about ways to either 1) increase revenue or 2) decrease costs. Unfortunately, there is no option #3, so you’ll have to get creative!
4. CREATING YOUR BUDGET DOCUMENT
No matter how you choose to plan your budget, you’ll want to make sure that it is clutter-free and easily-accessible. This should be a document that you can refer back to six months from now, or even look back on as you plan following budgets.
Excel and Google Sheets are two great options for getting started. In the event that you have complex calculations and dynamic fields, you might need a little more horsepower. But for the large majority of businesses, either of these tools will help you start laying the right foundation.
While you’re filling out the document, make sure to label, label, label. Try to not type numerical values directly into formulas where those values might be expected to change. Instead, type them into a cell and reference that specific cell. That way if you find yourself needing to change a number that would impact the rest of your calculations, you don’t have to manually update every element of your sheet.
After you have finalized a copy of your budget, you’ll want to upload it to your accounting software. We use tools like Jirav that integrate directly with your accounting system, whether you use Quickbooks Online or Xero. We upload historical data as well to help define key drivers—like number of employees, marketing as a percentage of income, or new tech purchases with additional hires—to help create a stronger budget.
5. DON’T FORGET THE FOLLOW-THROUGH!
Planning a budget is one thing… but actually following through is the goal! Once you’ve uploaded your budget, run your income statement actuals versus budget each month to help you identify any variances. You’ll want to check in periodically over the course of the next year to make sure you’re on track.
Quick Tip: A budget is not the same thing as a forecast. It can be easy to get the two mixed up! A forecast is more high level and is updated each month to reflect new information. This is based on realistic estimates that your company is likely to achieve. A budget, on the other hand, is much more detailed and fixed. Budgets typically outline what you hope to achieve. Once it’s defined, we don’t revise it.
