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Life after Budget

Finance, accounting and fintech, a man on a computer and calculator working out his business budget strategy. Businessman at his office desk, laptop, money management and financial investment online.

Hopefully by now the year’s budget was completed months ago and tracking results against it is ongoing.  Unfortunately, for many businesses, once complete, a budget finds its way into a drawer to not be seen again until it’s time for a new one the following year.  As one of the many Budgeting Best Practices we recommend, a deep budget review at end of each quarter end can illuminate key learnings and present an opportunity to revisit assumptions.  Let’s discuss what you can learn and what to do from here.

How Good is Your Process?

This quarterly review is an opportunity to assess the quality of the budget process itself.  If you are already significantly above or below budget in key areas, that calls into question the validity of the assumptions, the rigor of the process or worst of all, material execution misses.  This might invite a rethinking of planning going forward and can influence future decisions

Don’t Keep the Budget Open

Some companies don’t finalize a budget until well into the new year, waiting to get the most accurate assumptions or seeking more information.  A budget process should be thorough, but equally important is having a budget in circulation.  It is way too hard to draw a line on when the information is finally “good enough” if there is not a time deadline along with the budget.  Perfection in a budget does not exist, planting a flag in the ground to serve as a true north is key.

Budget vs Forecast

While a budget can be viewed as a type of forecast, it is almost always an annual process that leads to a comprehensive operating output.  We are strong advocates of forecasting and reforesting throughout the year.  Every quarter is a great routine cadence that can be helpful for management planning, external uses like updating lenders or investors and evaluating what-if scenarios as new opportunities arise.  Some specific examples include:

  • Forecasting higher revenue and payroll to support it if results to date are significantly ahead of budget (or possibly where cuts need to be made if revenue is off the mark)
  • Evaluating new investment opportunities that arise throughout the year and the impact they could have on the overall performance of the business
  • Contemplating payroll changes, such as departmental realignment in the wake of key departures during the year

This forecasting can be essential to provide confidence for management as well as external stakeholders as business evolves during the year.

Maintain Integrity of the Original Budget

Don’t change the budget!  Of course, there can be exceptions like a major error or calculation of a line item, but this is a very slippery slope.  Once a precedent is set, it is way too easy psychologically to manipulate numbers.  Constantly moving goalposts makes management ineffective.  While a company may argue we should adjust the budget because sales are already 25% ahead, what if the flipside were true?  If the company is underperforming and the budget is lowered, all that has done is changed expectations and condoned poorer performance.

A budget is a critical planning and operational tool for any business.  Regular forecasting is an equally important and complimentary tool.  Both allow management to be better students of the business, improve operational performance and navigate the challenges and opportunities that arise over time.