It is staggering how many of us throw around the word ‘budget’ with great abandon. Yet, when it comes to creating one, the vast majority of people simply enter ‘freeze mode’. They do not know what the word really means.

As a business coach and mentor, I probably see this pattern of behaviour a couple of times a month, usually with CEOs who are starting up a new venture. “Don’t worry. I know what I am doing.” And my questioning look of concern does not put them off.

Eventually, many of these know-alls come back sheepishly and ask “how can I do this correctly?”. What follows is a synopsis of what they are often told.

Tip No 1: Why does anyone need a budget?

Budgets give an indication of what is likely to happen to the business over a defined period of time. A well-designed model forces the planner to put fears to one side and to justify assumptions. It is poor assumptions that are the killers of good budgetary intentions.

Tip No 2: What is a budget?

A budget examines both the revenue potential and the expenditures of the operation in question for the period in question, taking into account all known information available. If you can go that extra mile to confirm a piece of data, do so.

Tip No 3: What detail is required?

If you are planning a commercial budget that takes you in to the realm of counting cents or pennies or even hundreds of your local currency, then you are probably trying to be too accurate. You should employ a measure of reasonability, generally slightly over estimating costs while revenues should be undervalued.

Tip No 4: Side sheets

Many people rely on a trusted and old-fashioned excel spreadsheet. That is fine. However, do not hesitate to use more that one spreadsheet. For example, I encourage clients to utilize additional sheets to create different income models.

Tip No 5: Can you give it a KISS?

The KISS attitude – keep it simple, stupid – is highly appropriate here. Your aim is to create a platform of numbers that can be quickly adapted and also help you to reach decisions. Trying to factor in irrelevant info, entering too many ‘what-if’ scenarios – ain’t gonna achieve that.

Tip No 6: Budget or cash flow?

Do not misunderstand your work. As mentioned at the outset, a budget is a set of financial numbers for a defined period of time. It does not reveal the cash flow of your organization! And that we can discuss next time.

The key take away from all of this is that budget planning need not be an impossible intellectual challenge. The basic parameters outlined above should enable you to describe in numbers the financial future of your company.