Help! My Annual Budget isn't Working
You worked hard to get your numbers just right and get your budget approved (via a board or maybe just you). 2021 started with so much hope and glimmer. But now it's the end of Q1, and your numbers are missing the mark. How do you fix things?
It's not uncommon to create a 6x6 budget, one that ends June 30 and another that picks up July through December, since businesses tend to shift throughout the year. However, it's not typical to have to re-forecast only after three months. But, if it's come to that, you can correct a few things for the next three quarters and get back on track before the end of the year.
To understand how this process will work, we first need to discuss proper financial reporting. If you work with us, you know our due diligence process and how timely we provide your financial documents. We recommend reviewing every report every month once it hit your inbox.
The Balance Sheet will help you understand your cash position, account receivable, and payable. To sum up your working capital requirements. You'll want to review December 31, 2020, versus March 31, 2021, to look for significant differences.
Your P&L statement will help explain how income and expenses are driving profitability. Here you will review March 2021 versus March 2020 and your year-to-date for significant differences.
Review March 2021 actuals compared to March 2021 budgeted numbers, examine each for significant changes and develop an explanation for any variances.
With three to five days of your end-of-month close, review all invoices, revenue streams, and all items used to calculate and help determine your profitable KPIs. These KPIs could be revenue per agent, time-efficiency on projects, etc. Each company has a different set of key indicators for success.
Pick a time each week (we recommend Monday) and walk through your cash flow statement. You need to understand what is coming in and going out each week to understand better what's to come in the next 16 weeks. If you find yourself low on cash in 10 weeks, you'll have another ten weeks to reroute your course. The main thing you want to implement is no surprises.
At this point, you'll also need to begin re-forecasting every month. Start by re-forecasting your P&L. Take your actual numbers from Q1 and plug them into the budget. Now you've created a new year-end budget for 2021 based on real Q1 numbers. Compare your new forecasted budget with the actual budget for 2021 and explain the variances.
Re-forecasting offers a less hands-on solution to an entirely new budget and can quickly be completed by you or your accounting team (your Basis controller can assist you). The only time we recommend a completely new budget is if there is a change in your business model. Otherwise, wait until June to complete your 6x6 budget.
You may also try setting aside money to cover times when revenue is lower than expected can help prevent future deficits. If you are already facing a deficit, then this may not work immediately, but employing this strategy in future budgets will prevent it from happening again.
You must review your financial documents every month as this cadence will help prevent economic challenges later down the road. If you find re-forecasting is the best course of action, so be it. You will have to reexamine your assumptions to be more or less conservative, reprioritize goals, and confirm the company's direction. Remember, your budget is the blueprint for a strong year, and it's critical to have a strong foundation for the rest of 2021.
