To help you start out, we have worked out a Budget Template in the Budget Toolkit that you can use, with the help of a fixed example. The first is to list out all your departmental expenses – salaries, utility bills, purchases, maintenance costs, travel, recruitment, training etc. You will also need to compare with departments with whom you may overlap, e.g. training may overlap with HR.
That done, you need to take into account rises in costs – increases in salaries due to promotions, recruitment or increments; increases in software and hardware prices or utility bills due to inflation etc.; cost of obtaining services (e.g. travel agent bills etc).
Once you have drawn up the overall budgets, get down to details. This post will discuss amortization, hardware capitalization and investment analysis.
Amortization: This template will help you plan out payments. Originally used in banking (for payment of loans), it helps you calculate EMIs where you have to account for principal and interest. You can use this template to calculate payments when you have purchased (or plan to purchase) something on an installment basis.
Hardware Capitalization: This template deals with hardware-related expenses. Once you have bought something tangible, its resale value keeps decreasing (depreciation). You have to figure that into the budget, as well the revenue you expect the asset to contribute to, and the maintenance cost associated with it. e.g. if you are a manufacturing company, the revenue generated by industrial equipment (say a lathe) may be easily calculated, whereas that for office equipment (say a laptop) may not. The template gives you a filled example of how you may go about calculating these expenses.
Investment Analysis: every expense you make, you will have to justify it on the basis of potential revenue. This is especially true for any new project you plan to undertake, given how conservative finance departments tend to be. One way of doing this is Net Present Value (NPV), which converts future expected revenues into current rates, accounting for inflation. Another is the Internal rate of Return (IRR), which determines at what rate of return every year you will recoup the investment. It must be above a minimum Hurdle Rate for the project to be considered viable.
We have prepared a template with examples on how you can prepare an investment analysis. Remember, a good budget is one which can convince skeptical decision makers that your venture is profitable in a given span of time.
