What is the best method to begin budget preparation?

Beginning budget preparation by reviewing financial information from prior years is a sound approach because it provides a historical context that is crucial for creating an accurate and realistic budget. By analyzing past financial statements, trends in revenue and expenses become apparent, allowing for informed projections for the upcoming budget year.

This historical review can reveal patterns such as seasonal fluctuations in income or consistent increases in certain expense categories that may not be immediately obvious without context. Additionally, prior years' data helps identify any anomalies or unexpected expenses that may have impacted the previous budgets, aiding in more accurate predictions for future financial planning.

While projecting net profit, estimating future expenses, and approving recurring expenses are all essential aspects of the budgeting process, they are more effective when grounded in the thorough understanding gained from past financial performance. Analyzing prior financial information prompts thoughtful adjustments and strategic planning, making it the most effective starting point for budget preparation.