What can your business do in January to improve all of
2023?
A budget isn't just
about planning for potential expenses or tracking results - it's about
providing a tool to actively manage your business profitability,
month-in and month-out. Here are some key tips to help your business in
2023:
Budget
vs. Actual
An important structure
of your budget is to track "budget vs. actual" (as opposed to
this year vs. last year). This helps to manage the finances of your
business accurately and strategically. By analyzing the monthly
differences between your agreed-upon budget and the actual amounts out
in the field (i.e., your "variance), management can catch
financial issues early on and develop solutions before they become
bigger problems.
The "budget"
column is the predicted amount based on strategic objectives tempered
by historical income and expenses, while the "actual" column
reflects real data. Whether the variance between the two is minor
(i.e., due to unforeseeable variations in spending and financial
activity) or significant (which should generally lead to immediate
actions), management will be able to review and then take efforts to
adjust operations in order to meet profitability goals.
Variances in expenses
can be caused by several factors including: materials/services market
dynamics (e.g., raw materials costs), labor costs (i.e., mismanaged
overtime), and machinery and equipment (breakage/repairs and
replacement). By knowing the difference between your projected budget
and actual spending, management can:
- Improve
financial reporting capabilities
- Determine
causes and take actions to improve future results
- Reduce
risk in corporate finances
On the income side,
variance analysis can sometimes generate surprising results. You may
find that a sudden drop in certain customer segments that wasn't
detected, or identify growth opportunities to take advantage of in the
future.
5 Steps
to a Better Budget
There are several steps that any
business can take to make the budgeting process more effective. Here
are five that MyCFO
has found to be helpful:
- Check
industry standards (i.e., comparative data from similar size
companies in your field) to see how you can improve performance.
- Involve
employees (gain their input and commitment)
- Define
and understand risks (i.e., strategically considering key factors
that could adversely affect performance)
- Anticipate
your sales cycle and cash flow
- Constantly
revisit your budget (at least monthly, more frequently depending
on your business dynamics)
Recent
Engagements
See our related article on "Budgeting
for Maximum Profit!" to see how MyCFO
assists clients with budgeting -- and how we can help you!
Planning
for Success
Successful businesses create annual
budgets and regularly monitor performance. Would you like to take steps
to make 2023 a profitable, successful year for your business? The
professionals at MyCFO
can offer invaluable expertise in the budgeting process. Contact us today for a free initial
consultation!
