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How can you create a budget that accounts for inflation?

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Creating a budget that accounts for inflation is a crucial skill for executive managers who want to plan ahead and avoid financial pitfalls. Inflation is the general increase in the prices of goods and services over time, which reduces the purchasing power of money. A budget that ignores inflation can lead to overspending, underestimating costs, and missing opportunities. In this article, you will learn how to create a budget that accounts for inflation in six steps.

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1 Define your budget period

The first step is to define the time frame for your budget, such as a month, a quarter, or a year. This will help you set realistic goals and track your progress. You should also consider the frequency and magnitude of inflation changes in your industry and market. For example, if you are in a highly volatile sector, you may want to use a shorter budget period and update it more often.

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Kishore Karia

Associate Director
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Should study past trends and try to build your model around it. Try to keep buffers in costs in an inflationary environment. Expect the trend to continue but also change course wherever required, do keep a close watch on expenses

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Anuraag Guptaa

Board Member | Mentor-Investor | President & CEO | Listed Unicorn, Pre-IPO Soonicorns | Harvard Business School | MBA-NYU Stern, LSE, HEC | Author Igniting Minds with a Million Views | Incubating CEOs Gurukul
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To create a budget that accounts for inflation, start by researching current inflation rates and economic forecasts. Increase your budget estimates for costs like supplies, utilities, and salaries to reflect expected inflation. Plan for higher costs in areas most affected by inflation, such as raw materials or transportation. Regularly review and adjust your budget as inflation rates change. Include a contingency fund in your budget for unexpected inflation spikes. Consider ways to reduce costs or increase efficiency to offset inflationary pressures. Monitor spending closely to ensure it aligns with your inflation-adjusted budget, making adjustments as necessary to stay on track.

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álvaro A. M. R.

Director Técnico en VEMISA, Profesor Asociado en UAH y UC3M y Profesor Colaborador en Nebrija
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Para proyectar la inflación en el ejercicio que se quiere presupuestar habrá que estudiar en primer lugar la tendencia pasada de la inflación y sucesos que la definan. En segundo lugar, habrá que encontrar los capítulos de nuestro presupuesto más afectados por la inflación, pues no debemos aplicar a todas las partidas una medida ponderada, como el IPC (es importante diferenciar entre inflación e inflación subyacente). Por ejemplo, si trabajamos en un sector donde la logística tiene impacto sobre el precio final, tendremos que tener en cuenta los precios al alza desde la COVID19 y los problemas actuales en el Mar Rojo.

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2 Estimate your income and expenses

The second step is to estimate your income and expenses for the budget period, based on your historical data, current trends, and future projections. You should categorize your income and expenses into fixed and variable items. Fixed items are those that do not change much over time, such as rent, salaries, and loan payments. Variable items are those that fluctuate with demand, supply, or external factors, such as sales, materials, and utilities.

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álvaro A. M. R.

Director Técnico en VEMISA, Profesor Asociado en UAH y UC3M y Profesor Colaborador en Nebrija
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Es muy importante definir ingresos y gastos de cara a calcular el punto muerto. El punto muerto es aquel en el que los ingresos se igualan a los gastos. Es fundamental para tomar las decisiones de capacidad. Los costes (o gastos) se pueden separar en financieros (derivados de actividad financiera) y no financieros (derivados de la actividad económica). Algunos no variarán con la producción, y serán los costes fijos. Otros dependerán de nuestro volumen de actividad: serán los costes variables. Por el efecto del "apalancamiento operativo", será conveniente traducir costes variables en fijos para disponer de una estructura de costes relativamente estable y poder planificar la actividad con suficiente antelación.

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3 Adjust for inflation

The third step is to adjust your income and expenses for inflation, using an appropriate inflation rate. You can use the general inflation rate for your country or region, or a specific inflation rate for your industry or market. You can find these rates from official sources, such as the central bank, the statistics agency, or the industry association. To adjust for inflation, you can multiply your income and expenses by (1 + inflation rate) for each year in your budget period.

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álvaro A. M. R.

Director Técnico en VEMISA, Profesor Asociado en UAH y UC3M y Profesor Colaborador en Nebrija
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La inflación tiene un efecto directo sobre nuestros beneficios. Si no ajustamos nuestros precios de venta con las subidas de los precios de los insumos, estaremos reduciendo los beneficios. Relacionado con la estructura de costes y el presupuesto del ejercicio, es muy importante saber cómo crecerá el coste de nuestros insumos. Con esto podremos establecer nuestros precios de venta (además de comparar con el mercado) y calcular el punto muerto (o de equilibrio), para modificar, si fuera necesario, nuestra capacidad. Para ajustar de manera precisa, debemos aplicar la inflación concreta a cada uno de nuestros insumos.

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4 Compare your income and expenses

The fourth step is to compare your income and expenses after adjusting for inflation, and calculate your net income or loss. This will show you how much money you have left after paying for your expenses, or how much money you need to borrow or save. You should also compare your income and expenses with your previous budget and actual results, and identify any significant changes or gaps.

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álvaro A. M. R.

Director Técnico en VEMISA, Profesor Asociado en UAH y UC3M y Profesor Colaborador en Nebrija
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Una vez terminado el ejercicio, debemos comparar ingresos y gastos con ejercicios anteriores. De esta manera, podremos saber cuál es la tendencia, en productividad de nuestro negocio. También podremos saber qué decisiones tenemos que tomar para adaptarnos al escenario macroeconómico, pues los ingresos y los gastos no van a depender exclusivamente de nuestra actividad económica, sino que parte vendrá dada por el entorno. Y tenemos que saber interpretar el escenario para poder adaptarnos lo mejor posible (inflación, cambios impositivos, fluctuaciones repentinas de la demanda, cambios en la oferta de nuestros insumos,...). Tenemos que ser flexibles y rápidos para adaptarnos a una realidad cambiante para sobrevivir.

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5 Set your budget goals and priorities

The fifth step is to set your budget goals and priorities, based on your net income or loss, and your strategic objectives. You should decide how much money you want to allocate to different areas of your business, such as growth, innovation, quality, or efficiency. You should also prioritize your expenses according to their importance, urgency, and impact. You may need to cut some costs, increase some revenues, or adjust some assumptions to balance your budget.

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6 Monitor and review your budget

The sixth step is to monitor and review your budget regularly, and make adjustments as needed. You should track your actual income and expenses against your budget, and analyze any variances or deviations. You should also update your budget for any changes in the inflation rate, the market conditions, or your business performance. You should communicate your budget results and actions to your stakeholders, such as your board, your team, or your investors.

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Austin Elsey, CMA, CFE, CRC, CSCA, MAFF, CDFA

Financial Solutions | Professor | Speaker | Doctoral Student | Board Member | Expert Witness | Consultant
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A good budget is never a final budget. Even the best preparation can run into unexpected events and external changes. Therefore, I have found it's best to prepare a range of expectations and then build in triggers for when the budget needs to be revisited.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Chidi Ileka

Business Executive | Business Strategy | Business Transformation | Corporate and Commercial Banking Revenue Growth | Cost Efficiency | Sales & Marketing
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Having worked in an environment that deals with high inflation occasionally, I have a simple suggestion. One performance index that is not vulnerable to inflationary pressures is market share. Measuring share of market accurately and consistently requires as much rigor as it offers reward. In a high inflation environment, setting budgets that primarily derive from growth in market share can help Executives to lead teams to such performance outcomes that earn team members professional prestige while helping the organization outperform competition.

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Nitesh Rastogi, MBA, PMP

AI Enthusiast??Strategic Leader in Software Engineering??Driving Digital Transformation and Team Development through Visionary Innovation
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Creating a budget that accounts for inflation involves estimating future cost increases and incorporating these into your financial planning. Start by reviewing historical inflation rates to forecast potential increases. Adjust your revenue and expense projections accordingly, ensuring they reflect realistic inflation-adjusted values. Allocate a contingency fund to cover unforeseen inflation spikes. Regularly review and update your budget to respond to actual inflation trends. This proactive approach helps maintain financial stability and ensures long-term planning accuracy despite inflationary pressures.

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How can you create a budget that accounts for inflation?

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1 Define your budget period

2 Estimate your income and expenses

3 Adjust for inflation

4 Compare your income and expenses

5 Set your budget goals and priorities

6 Monitor and review your budget

7 Here’s what else to consider

Executive Management

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How can you create a budget that accounts for inflation?

1

2

3

4

5

6

7

1 Define your budget period

2 Estimate your income and expenses

3 Adjust for inflation

4 Compare your income and expenses

5 Set your budget goals and priorities

6 Monitor and review your budget

7 Here’s what else to consider

Executive Management

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