Budget process

The budget is the plan in which your company lays out how it intends to finance its operations. It explains where money is coming from and how much you intend to use it during the budget period.

The budget period is often the company’s accounting period or a calendar year. It can be divided into quarterly or monthly budgets, for instance. In addition to an annual budget, you can prepare a medium-term budget for two to three years and a long-term budget for three to ten years for your company. Instead of fixed budget, you can also use other budgeting methods (such as rolling budget).

When planning a budget for your company, analyse the figures from the previous period. If there is a difference between the goals and actual figures, find out why this is. Consider what impacts changes occurring in the market during the period have had on your company.

You should also make use of your company’s operating plan for the upcoming period, including future marketing activities and investment. Also evaluate the impacts the changes within your company and external changes caused by the market may have on your company’s future activities and financial status.

Set goals related to financial issues for your company for the duration of the budget period. First, prepare the goals in words to make sure that they are sufficiently detailed and clear. Only change the goals into figures once everyone understands what your goal is.

For example, your budget may be based on how much profit your company aims to make in the upcoming period. Ensure that your entire staff is committed to reaching the goals and following the budget at the same time.

Start preparing the actual budget by drawing up partial budgets. The partial budgets may include your sales budget and variable cost budget.

Use partial budgets to draw up the main budgets. The performance budget, balance forecast and cash budget are the main budgets. If necessary, revise the budgets and make the necessary additions to them so that you can meet your targets.

When the budget is complete, it must still be approved by your company’s decision-making bodies.

For help in preparing the budget, contact your accountant or the business development company from your region.

To be able to prepare main budgets for your company, you must first prepare partial budgets for the most important functions of your company.

The sales budget is the most central partial budget and indicates your sales targets. Estimate how much of which product you will sell over the period. You may also prepare a sales budget based on matters such as the number of customers and average purchase sum.

Use an investment budget to indicate the investments required by your business activities. These may concern real property, machinery or equipment, for instance.

A variable cost budget, or manufacturing budget, indicates the costs varying based on your production and sales volume. For example, if you are manufacturing a product, enter the production volumes, consumption of raw materials and working time required for the manufacture into the budget.

A fixed-cost budget comprises the costs that are the same regardless of production and sales volumes. These include fixed salaries, loan servicing costs, rents and insurance premiums.

You can also prepare separate budgets for personnel expenses, financial expenses and marketing costs. 

Use the partial budgets as the basis for the main budgets. The performance budget, balance forecast and cash budget are the main budgets.

A performance budget predicts your company’s performance. You must enter your company’s projected profits and expenditure on a performance basis to the budget. In other words, you must enter into the budget the transactions occurring during a period even if money will only change hands later. Compare the performance budget with the previous period to follow the development of your company’s performance.

The purpose of the balance forecast is to provide a forecast of your company’s financial status at the end of the budget period. It estimates how your company’s assets, property and liabilities will be divided. You can prepare the balance forecast using an official balance sheet formula.

You can use the cash budget (financing budget) to ensure that your company has enough money to pay the expenditure set out in the performance budget on a weekly and monthly basis. Enter your company's assets and information on how you intend to use these in the cash budget. Transform the performance-based figures of your performance budget into cash-based numbers inclusive of value-added taxes to see how far your funds will actually go.

The success of the budgeting process requires monitoring the budget. It allows you to observe how your company achieves its goals, look for differences between the budget and your company’s actual performance, and find reasons for these differences. It allows you to direct your company's operations to ensure that it meets its goals.

Monitor your company’s budget implementation accurately and systematically throughout the entire budget period. The optimal intervals for monitoring the budget depends on your company; usually, you follow the budget once per month.

If you notice that there is a difference between the budget and the actual performance, you should analyse the cause for this immediately. The difference may be caused by a significantly changed operational environment, unrealistic goals, or activities that do not comply with your plans. When you find out the reasons in time, you will be able to correct the mistakes and prevent problems.

You can normally change the budget during the budget period if necessary. However, if your company uses a fixed budget, you may not be able to change it during the period. However, you may aim to prevent problems by adjusting your company’s spending to the remaining budget.