How to Choose a Type of Budgeting Within QuickBooks 2011
Before creating and using a budget within QuickBooks, you'll want to consider three very useful and common budgeting tactics: top-line budgeting, zero-based budgeting, and benchmarking. None of these three tactics is complicated, and QuickBooks makes them even easier. You probably know of and understand at least two of them already. You should consider all these tactics, however, as you construct formal and informal budgets for your business.
A top-line budget is the simplest budget technique available. It takes last year's numbers or last month's numbers and uses them for this year's budget. Of course, if inflation has occurred, a top-line budget may inflate last year's or last month's numbers by using an inflation factor. Or, conversely, if the business has shrunk a bit or fallen on hard times, the previous year's or month's numbers may be decreased by some amount.
Top-line budgeting has at least a couple of arguments in its favor.
Top-line budgeting is easy. This is something big in its favor. Other budgeting techniques are often much more work.
Top-line budgeting is based on reality. The numbers from last year or last month are real. This fact is a unique benefit to top-line budgeting that other budgeting tactics don't offer.
Top-line budgeting, however, possesses a well-known weakness: It tends to perpetuate previous bad-budgeting decisions.
Zero-based budgeting is the opposite of top-line budgeting. It works from the bottom up. A zero-based budget starts with individual revenue, expense, asset, liability, and owner's equity accounts. It examines a specific account and then tries to apply common sense and logic for coming up with a good postage expense budget amount.
The advantage of zero-based budgeting is that it tends to fix poorly figured, previously budgeted amounts. It also makes people who benefit from or use some budgeted amount responsible for that budgeted amount. For example, if some manager spent $50,000 on travel expense last year, zero-line budgeting makes the manager prove through the application of common sense and simple arithmetic that $50,000 of travel expense is reasonable for this year.
Benchmarking compares your actual or your preliminary budgeted numbers to the same numbers of similarly sized businesses in your industry. If you know what other firms or other sole proprietors are spending, that information can probably help you to budget what you should or can spend. The challenge, of course, is getting that comparable information.
Fortunately, getting comparable information is easier than most people realize. You can usually get information about the financial statistics of comparable firms at your local library or through industry associations.
Putting it all together
Just for the record, you shouldn't use just one approach to build your budget. You may use top-line budgeting for some of your numbers, and you may use zero-based budgeting for other numbers. And for really important or key numbers in your budget, you may take the time and effort to benchmark your numbers against those of similarly sized firms in your industry. Good budgeting, then, combines these three budgeting tactics to come up with a budget that makes sense and lets you plan your finances for the year.