During the course of a recent conversation, a contractor I was visiting with uttered the classic line "I never have as much money at the end of the year as I expect to." He was very curious as to why that keeps happening to him. Do you suffer from the same fate?

Before racing into 2008, this seems like a good time to talk about a task that many choose to blow off - creating an annual budget. The lack of an annual budget usually produces the end-of-year surprise just described.

An annual budget allows you to stay on top of your financial progress as your year unfolds. It arms you with the ability to reel in expenses before they kill your bottom line. Even better, the budgeting process forces you to think through your strategy and resource allocation. It forces you to account for every expense your company will suffer during the upcoming year. It helps you connect project profits to company net income.

In simple terms, your annual budget is a financial representation of your current business plan. Being able to explain and defend your budget to bankers and lenders leaves a strong positive impression on them. Knowing that you understand how your business makes money is something they really like to see.

Let's shift our discussion away from the "why to" budget and put in on the "how to" budget. Creating your budget takes three steps.