Business Budget Not Working?

As this is being written, we’ve just finished the first calendar quarter of the year. For many companies, this is the first real view into how they are doing against the annual budget they set. (Note: While this article will reference a calendar year (meaning that the business year runs January through December), it applies to any fiscal year and to any business that is using a budget.)

It can be easy to dismiss any budget misses in January and February – and maybe even the first quarter. After all, there are still 9 months or 75% of the year yet to come! There’s time to make up the differences.

Maybe, maybe not…

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What To Look For In The First Quarter

The biggest element you are looking to confirm after three months into the budget cycle is this: the assumptions. Often assumptions include more than one thing – but they are not simply “We’ll make more and spend less.”

Here are the key categories to review – they need to be reviewed in both the actual results and the budgeted ones to get a clear picture about what is driving results (or lack thereof):

Average revenue $ per sale. This can look like different things for different companies. Here are a few examples from our private advisory clients: average $ per square foot (countertop company); average services package (medical spa); average booking (event venue); and, average fee per head (staffing company).
Total sales volume based on # of clients. This could be clients, contracts or bookings. It is not, however, dollars. It is just a count of how many came through the door and bought (or signed up or contracted).
Average direct $ cost of product/service. How much did it cost to directly fulfill the service or product? This is not overhead (rent, utilities, legal fees, etc)?
Absolute $ differences in operating expenses. Since operating expenses don’t generally change in the short-term with how many customers the company serves, these categories can easily be reviewed for actual dollar differences to budget.

Other things to keep in mind:

Don’t be surprised to see big negatives and big positives in the metrics. Shortfalls and overruns may be offsetting each other so it looks worse than it does in the overall income statement.
Timeframe matters. If the budget has the same averages every month of the year, but the company has more seasonality or cyclical results, that could be showing up in any and all results.

What To Do Now

It can be disappointing if there are budget misses. After all, you and your client’s team probably spent a decent amount of time and effort into developing the budget. Letting the disappointment or frustration win just stalls the entire process – especially if the immediate answer is that the budget is junk and just needs to be ignored for the rest of the year.

That’s a temporary fix at best. Give it two or three months and it will be back to “how do we know if we’re meeting our goals?”

Here’s what to do instead based on the assumption review:

If key items were wrong in the budget (for whatever reason) AND total results are way off, it may be time to update the budget for the remainder of the year to factor those in.
If key items were wrong in the budget (for whatever reason) BUT total results are coming in relatively well, there are likely offsetting big swings in the assumptions. The most common one is that the rate (average $ per sale) is offsetting the volume (# of sales). This can go either direction, and they can make up for each other. This requires more robust monitoring as a change in one but not the other will change the dynamic and the absolute results.
If there are likely timing differences, usually because the budget used the same volumes or averages for the entire year, those differences and related conclusions should be noted. It is likely worth digging into both the monthly results and the year-to-date results going forward to ensure that this is indeed true. You’ll know because the gap between the budgeted annual amounts and the average year-to-date amounts starts to get smaller and smaller.

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