Budget build

You build the year's budget from the things that actually drive the business (customers, prices, volumes, people, contracts), so that when a number moves later everyone can see which assumption moved it. Every assumption has a source and an owner, every month is phased deliberately, and the workbook ties out before anyone sees it. The owner sets the targets and signs the budget off; you build it and challenge it.

When to use

• "Can you put together next year's budget?"
• "The bank wants a budget with the loan application."
• "What would it take to hit 1 million in revenue next year?"
• "We're hiring three people, put them in the plan."
• Before the year starts, or when the current budget is no longer useful (re-forecast).

What you need

• At least 12 months of actuals by month (P&L by account), and the balance sheet. Access, best first: a connected app (Xero, QuickBooks) on the Connections page; your own browser signed in by the owner to the accounting software; or exports from the owner. If none is there, ask with clarify.
• The owner's goals for the year (revenue, profit, cash, headcount) and known plans: price changes, new products, hires, moves, big purchases.
• Revenue drivers by business type (see references/budget-workbook.md): customers and price; units and price; billable hours, rate and utilisation; orders and average order value.
• The current team: role, salary, start date, hours. Employer on-costs (payroll taxes, pension, benefits) vary by country: check current rates with web_search on the tax authority's site and cite them, or take them from the accountant.
• Contracts for fixed costs: rent, leases, software, insurance, loans, with renewal dates and price escalators.

Method

1. Agree the frame: financial year, currency, level of detail (P&L by account group, not every ledger code), whether a cash view and a balance sheet are needed, and the deadline for sign-off.
2. Analyse the actuals first. Monthly trend, seasonality (each month's share of the annual total, averaged over two years if available), gross margin range, cost lines that are fixed vs variable, one-offs to strip out. Put this on a History sheet.
3. Write the assumptions on one Assumptions sheet: each with value, unit, description, source, owner and date. Nothing typed into the calculation sheets except labels. A number without a source is a question for the owner, not an assumption.
4. Revenue from drivers. Build the driver rows (customers, churn, new customers, price; or units, price; or heads, hours, utilisation, rate) by month, then revenue = driver times price. Phase new business by the seasonality profile and the sales capacity, not evenly. Price increases start in the month they take effect.
5. Direct costs from unit costs or a margin percentage tied to the history range. If the budget margin is outside the last two years' range, write down why.
6. Headcount plan, person by person: role, salary, start month, end month, employer on-costs, recruitment costs, equipment. Include pay rises from the month they apply, and vacancies at the realistic start month (hiring takes time).
7. Overheads by contract, not by "last year plus 5%": rent per the lease, software by subscription and seat count, insurance at renewal, marketing by campaign plan, professional fees by engagement (year-end accounts often land in one month). Inflation only where no contract exists, stated as an assumption.
8. Below the line: depreciation from the asset plan, interest from the loan schedule. Corporate tax only if the accountant gives the rate and method.
9. Cash view (if needed): convert to cash with collection days on revenue, payment days on costs, VAT or sales tax timing, payroll tax timing, capital spending, loan drawdowns and repayments. Monthly closing cash must never be below zero without a funding line.
10. Build the workbook with execute_code (openpyxl, live formulas from Assumptions through to P&L). Structure and tested code: references/budget-workbook.md.
11. Tie it out: compute the same model in Python and compare every month's revenue, EBITDA and cash with the evaluated formulas. Annual totals = sum of months; payroll in P&L = Headcount sheet total; no hardcoded numbers in calculation sheets (scan every formula sheet for constants).
12. Challenge it before the owner does: revenue growth versus last year and versus sales capacity; margin versus history; revenue per head; overheads as % of revenue; the month cash is lowest. If the goal is not met by the drivers, show the gap and what driver change would close it ("hitting 1m needs 46 new customers a month, against 21 last year").
13. Version and sign-off. Save as v1, v2, and so on, with a change log. The owner approves the final version; lock it as the baseline that monthly results are compared against.

Worked example: revenue from drivers

Subscription business: 310 customers at 1 January paying 120.00 a month, churn 2.5% a month, new customers phased by sales capacity and seasonality (18 a month in January and February, rising to 30 in November, 20 in December).

• January: 310 x (1 minus 0.025) + 18 = 320.25 customers; revenue 320.25 x 120.00 = 38,430.
• February: 320.25 x 0.975 + 18 = 330.24; revenue 39,629.
• Every later month follows the same formula. December ends at about 467 customers and 56,065 of revenue; the year comes to about 565,000. If the owner's goal is 600,000, show the gap and the levers: a price of about 127.50 from January, or an average of about 26 new customers a month against the 22.6 in the plan. The owner picks; you do not quietly raise the driver.

Worked example: a person in the headcount plan

Developer, 55,000 salary, starts in April, employer on-costs 15% (rate checked for the country and cited), recruitment fee 8,000 in March, laptop 1,800 in April (an asset, depreciated, not expensed). Monthly cost from April: 55,000 / 12 x 1.15 = 5,270.83. Payroll cost in the budget year: 9 months x 5,270.83 = 47,437.50, not 63,250.00. A 3% pay review in October lifts the monthly figure to 5,428.96 from that month. The March recruitment fee sits in overheads; the laptop sits in the asset plan and feeds depreciation.

Challenge table (fill it before the owner sees v1)

Question	Last year	Budget	Comment
Revenue growth	+12%	+31%	Needs 46 new customers a month against 21: who sells them?
Gross margin	76% to 79%	78%	In range
Revenue per head	98,000	84,000	Hiring ahead of revenue; show the month it recovers
Overheads as % of revenue	41%	38%	Rent fixed, software per seat: plausible
Lowest cash month	March	April, 11,200	Below the 15,000 buffer: facility, or delay a hire by two months
Every row with a question becomes a line in the budget memo.

Seasonality

Each month's share = that month's revenue / the year's revenue, averaged over the last two years and normalised so the twelve shares sum to 100%. Apply it to new business and variable costs, not to contracted revenue or fixed costs. A business with no history uses even phasing and says so on the Assumptions sheet.

Output

• budget-<year>-v<n>.xlsx with sheets: Summary, Assumptions, History, Revenue, Headcount, Overheads, P&L (monthly + FY), Cash (if needed), Checks, Change log.
• A one-page budget memo: headline numbers, key assumptions, the 3 biggest risks to the budget, and what the owner must decide.
• A show_card with FY revenue, gross margin, EBITDA, closing cash, headcount at year end, and the lowest cash month.

Checks before you finish

• Checks sheet all TRUE, and the Python tie-out returns no problems.
• No constants inside formulas on calculation sheets, except 0, 1 and 12.
• Every assumption has a source and owner.
• Seasonality profile sums to 100%.
• Headcount costs start and stop in the right months.
• Budget year growth, margin and cost ratios are compared with history and explained where different.

Pitfalls

• Last year plus a percentage. It hides the drivers and makes variance analysis useless.
• Dividing annual numbers by 12. Real businesses are seasonal, and costs land in specific months.
• Forgetting employer on-costs, recruitment time, annual increases and the year-end accountant's bill.
• Hardcoding. A number typed into a formula is invisible and breaks the model the first time it changes.
• Treating VAT or sales tax as revenue or cost when the business is registered.
• A budget the owner did not set. Your job is to make their targets concrete and show what they require.

See also

• thirteen-week-cash-forecast, financial-scenario-model, management-accounts-pack.