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Budgeting Essentials Blog

Helping you master the practical essentials of Budgeting, Cash Flow, Accounting and Debt Relief.
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Budgeting – Review Regularly and Adjust as Necessary

Last week I talked about Budgets are the owner’s responsibility, not the Accountant’s.  If you missed that post, you can review it HERE.  This week’s post is Budgeting – Review Regularly and Adjust as Necessary.  Once you have completed your budget, you are not done working with it.  You need to compare the budget to your actual results.  Then your variances will show you where you may need to adjust your operations.  Learn more in this week’s blog.

 

You have followed all the budgeting principles and tips and completed a well prepared budget for your business.  Now you can relax and forget about it until budget time comes again next year, right?  We all know that the answer to that is no.  When your budget is completed, you have given yourself a great tool to help you run your business.  But like any tool, if you don’t use it, it doesn’t help you.  You have to use it!

Ideally, you should review the financial results of your business on at least a monthly basis.  You may have items that you want to review more often than that.  This is like keeping score in a ball game.  If you don’t look at the scoreboard, you don’t know how you are doing.  Unlike a ball game, the score in your business tells you if you are making money or not.  You don’t want to be on the losing side of that score.  The way you  keep score in your business is by preparing a monthly income statement and comparing it to your budget. 

As you compare your monthly income statement to your budget, you will be able to see areas where your actual performance is off from your budget. These are the areas that you need to examine.  Make sure you look at both the areas you are doing better than your budget and the areas where you are doing worse than your budget.  When you are looking at the numbers, start with the biggest variances first.  These are the areas that you are going to be able to make the biggest difference for your business.

When you are looking at the variance areas, there are a couple things to keep in mind.  Start by making sure that you have all your financial data included and in its proper place.  You may be missing an invoice or have an item recorded twice.  These things will give you inaccurate results.  Get any corrections you need to make recorded, then run your comparison again.  Once you have done that you can dig in to the remaining variances to determine why they are there.  Did you get an unexpected price increase on a key item you purchase?  Did you underestimate what a job was going to take or run into problems that required extra (time, materials, etc.) to complete the job?  Use your business knowledge to help you learn from what happened and use what you learned from analyzing the variance to move your business forward.

Remember to look at the positive variances as well as the negative ones.  As you are striving to improve your delivery to your customers, you may have done something that will benefit your business without realizing it.  You want to be able to replicate that going forward, both to give your customers better service and to improve your financial performance.  Keep an open mind when you are looking at these areas so you don’t make a wrong assumption based on what you already know.  We are in a fast changing world, don’t be left behind.

A great example of this is Blockbuster Videos and Netflix.  Blockbuster thought they were in a brick and mortar business of renting videos and games.  They didn’t see that the internet as a delivery method that they needed to include in their business.  Netflix recognized it.  Now Blockbuster is gone and Netflix is prospering.

Do your financials as soon as you can after the end of the month.  The sooner you have them, the more time you have to make any needed adjustments.  Don’t change your budget because you have variances.  You will have variances, because a budget is a plan that is an estimate.  You typically will not match every number every month.  You should only change your budget when you have a significant change in your business.  This could be a large new contract that you have signed or the loss of a large customer.  If your budget was well prepared, make your adjustments to your business, not your budget.  Your business is where you can make a difference.  A new budget will do nothing for you if you don’t change your business to reflect it.

Remember that your budget is a tool that you use to manage the finances of your business.  Use your budget to make adjustments to your business.  Those adjustments will help you put more money in your pocket every month!

If you know someone this post will help, please share it with them!  Then scroll down to the comments section and leave me a comment on this post.  If you aren’t already a subscriber, sign up to receive notification emails and information on other promotions!

Have a great week!

Copyright

© 2018 Dan Heiland 2018 Kat Heil, LLC

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