You are here

It’s that time of year again – or at least it should be! It’s time to finalize next year’s budget, if you haven’t done so already. Budgeting is an essential process for every successful business, and helps achieve long-term business goals and set shorter-term business priorities. A budget, when synchronized with a long-term business strategy, good forecasting and targeted reporting, provides exceptional guidance to monitor and manage performance. A sound budget serves as a benchmark for the fiscal year.

BUDGETING: STREAMLINE THE PROCESS
There are many ways to drive efficiency in the budgeting process and maximize the benefits of budgeting. Here are few tips –

START EARLY, FINISH EARLY
There’s no rule of thumb about how long the budgeting process should take, but it’s important to have the budget finalized before the start of the fiscal year. Give your team time to gather and work with the information they need. Keep the process moving by creating interim deadlines for first-pass numbers and discussion periods.

START FRESH
Don’t use last year’s budget as a guide – it’s irrelevant. Rather, budget against historical and forecasted actuals. Consider the impact of forward-looking events, competitive or economic changes.  Make sure someone at a senior level ensures that the budget is in line with long-term strategy.

BE REAL
Classify components of budgeted revenue – what’s known and already booked, what’s in the pipeline and what’s unidentified. As a reality check, test your pipeline and unidentified numbers against your historical ability to accurately budget actually book that business. If budgets from the sales force in the past two years have been 20 – 25% higher than was achieved, for example, consider reducing the current-year budgeted numbers accordingly. Of course, if the sales force consistently low-balls the budget, consider pushing back for higher budgets.

IDENTIFY LEVERS
Make sure there are adequate levers and contingencies on the expense side to mitigate the impact on lower-than-budgeted revenue on profitability.

CREATE MONTHLY BUDGETS
While it might be tempting to just divide annual numbers by 12, straight-line allocation of an annual budget diminishes the utility of the budget. Too often budget-versus-actual variances identified as “due to timing” mask important trends. Figure out timing on the front end and build it in.

DO A HISTORICAL SANITY CHECK
Look at a history of actuals that span three, five or 10 years. By looking at this range, you’ll likely hit different economic cycles, trends and competitive scenarios that mirror today’s environment. This will help you evaluate the appropriateness of your numbers.

LET OPERATIONS RULE
Put budgeting responsibility in the right hands. Your operations team should own their numbers — not the accounting group. The operations team is likely to be more aware of changes anticipated in the market, supply chain and other external elements. The accounting team should be focused on compiling, analyzing, reporting, and driving the timetable as it relates to the budget preparation process.

FOCUS ON KEY DATA POINTS
When determining to what detail budget components should be budgeted, focus on the components that are truly relevant to what you’re trying to assess relative to revenues, expenses and profitability. For example, budget (and report on) key drivers such as average order size, number of customers, and training dollars per employee. These may be the key drivers to achieving strategic goals.

TEST FOR COMPLIANCE
For companies with bank covenants and borrowing limits, make sure you test your budget for compliance. And, if your budget tells you that you’ll be out of compliance at some point in the year, take that as a sign that you need to have conversation with your bank — sooner rather than later!

DON’T “RE-BUDGET”
Re-budgeting can negatively impact a culture of accountability and commitment to the annual budgeting process. Even difficult and somewhat unexpected economic events like the recent recession don’t warrant a re-budgeting process. Use forecasting to respond to unanticipated events and opportunities.

A note about Forecasting – forecasts represent a projected look at revenues, profitability and expenses based on year-to-date actual data, plus projections based on what you know now that you didn’t know when you were preparing the budget. The same people who are responsible for budgeting should be responsible for forecasting. Even if you choose to only update forecasts on a quarterly basis, it will be helpful for strategic decision-making

REPORTING: WHAT’S MOST VALUABLE?
Budgets and forecasts are useless without proper reporting, so be thoughtful about the information you want to get out of your reporting –

LOOK AT THE BIG PICTURE
While monthly budget-versus-actual data is valuable, a look at forecasted full-year data will also be helpful. Don’t fall into the trap of celebrating an outstanding month of actual sales exceeding budgeted sales when poor performance against budget in future periods can be anticipated.

WHO NEEDS WHAT?
One size does not fit all. Reporting should differ according to your audience. Too much data or irrelevant data can be distracting. In the long run, what’s most efficient is to prepare reporting packages in the appropriate form for the appropriate groups of individual users.

CONSIDER YOUR AUDIENCE
Accountants sometimes assume that everyone can “read” numbers like they can. Not true. Graphs, charts or narrative can be extremely effective, especially for operations people or board members who do not have financial training or experience. Be concise and clear, and avoid using acronyms and jargon that some might not easily understand. 

Also, be flexible with your reporting format. A presentation during a conference call or meeting sometimes works just as well or better than circulating written reports.

FORGET THE PRIOR YEAR
There’s no point in reporting against the prior year. If your budgeting process worked, all of the discussion and the basis for variances from the prior year should have been vetted in developing budgeted numbers. Don’t let performance below budget be masked by a discussion of all the reasons why performance is better than the prior year. Eliminating prior year reporting is also a time saver.

SPEAK TO THE IMPACTS
What do people really need to get out of the budget-versus-actual reports?  Always be thinking of variances in the context of what’s ahead. It may be important to include commentary on how, for example, lower-than-budgeted sales will affect this year’s incentive compensation. Or perhaps, higher than budgeted shipping and handling costs can be highlighted in the reporting in consideration of the up-coming renewal of the company’s shipping contract.

TEST REPORT UTILITY
If someone asks for a new report, consider who else might be interested in the same information. If the new report includes redundant information to an existing report, get consensus among the users as to the most useful presentation. Finally, try this periodically: produce the standard monthly reporting package(s) but distribute each component on an as-requested basis. You’ll see who is paying attention to the reporting package and what’s of most value.

BE ACCURATE
This should go without saying, but you’d be surprised how often reporting errors sneak in. Your information must be reliable and accurate so that people can make good decisions.

Effective budgeting and reporting is a means for positive business communication regarding accountability – and accountability drives behavior.  It’s also a key component to successful implementation of a strategic plan. It’s never too early to start ramping up your plans for the implementation or overhaul of your budgeting process.

If you have any questions, contact Margery L. Piercey, CPA, CGMA, Member of the Firm, at 617-428-5422 or mpiercey@wolfandco.com