The Budget Process | Where does your company stand?

April 17, 2012
Austin Buckett

Austin Buckett

Manager

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Right now, we are well into the second quarter of the year.  Have you evaluated your Q1 performance against your original budget?  The budget process should be an ongoing event, not a once-a-year chore.  To make the most of your budget process, an evaluation should be made at least quarterly to determine if the budget that was created originally needs updating to remain relevant and useful. 

Failing to update a budget appropriately, especially when large difference accumulate during the year, will normally result in negative consequences.  As an example, exceeding a budget significantly can lead to complacency (especially among sales teams) and not fulfilling your company’s potential for the year. On the flip side, not adjusting a budget to reflect some reduced performance can lead to bad morale and a self-fulfilling prophecy until a new year comes around. 

Here are some things to consider when comparing your actual performance to your budget and possibly making changes for the remainder of the year:

  • The process of reviewing any variances between budget and actual performance is much more important than setting the budget and seeing how close you came.  This review process will ensure you spend time ‘on’ your business and step back to consider what is happening to your business so you can make adjustments throughout the year and not miss opportunities.   
  • If a revised budget is necessary, make sure you keep an original budget in play, especially if it is tied to bonus plans or personal performance reviews.  The revised budget becomes the one that everyone uses for future operations only. 
  • If your budget is only slightly different than actual performance, leave the original budget in effect.  However, run ‘scenario’ budgets for your own benefit to determine a more likely result in case the original budget does not get back on track. 
  • Many events will occur during the year that impact your business, make sure these are considered and your budget is updated to account of these situations so you can be prepared for the resulting financial impact. 
  • Understand the reasons variances occurred before adjusting future targets?  For example, if revenue is up for the year but no one can point to specific reasons why, do not make an assumption that the trend will continue and adjust sales targets to a much higher level. Rather, reset the annual expectation to account for actual performance to date and leave the rest of the year at the original target. 
  • How do the variances in your budget compare to your Key Performance Indicators (KPIs)?  For example, if revenue is up but your number of customers has reduced, then you may be too reliant on a handful of customers to drive your growth.  Not that you would want to turn their business away but you would want to understand why other customers are not growing proportionately or why your customer base is shrinking.

The overall objectives of budgets are to motivate your team and minimize financial surprises. You want to make sure your budgets remain achievable and realistic throughout the year, striking the right balance between optimizing your company’s performance and keeping your employees motivated.  Careful review of your budget vs. actual performance on a quarterly basis will ensure you accomplish this and drive your business forward.

For questions, contact Austin Buckett here.

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