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The Budget & Forecast Process – What Really Matters

Get real, meaningful value from your budgeting process

By Alan Hart, MBA

How much value is your organization getting out of the budget process, once the budget is created?  Is management able to quickly and intelligently make decisions driven by actual operations results compared with budgeted expectations?  How often do you have an opportunity to decide whether changes are required, and to evaluate alternatives?  How complete and accurate is your forecast?  Do you employ the best-in-class tools to provide you with the information you need?

Managements, and their supporting functions, one of which is the finance department, usually tasked with the budget preparation, should consider these questions very seriously.

I recently interviewed a manufacturing business owner who said he tries to analyze actual results against his forecast on a weekly basis, as it gives his organization 52 chances a year to make corrections versus only 12 times a year if done on a monthly basis.  You may not be able to do this weekly, but how about monthly?

Fortunately, present day accounting systems are fully computerized and automated, which gives us very good access to the information we need and on a regular basis.  It is fairly common, with the right setup, to be able to seamlessly interface our general ledger with our budgeting and forecasting software, in a manner that will allow us to transfer, on a monthly basis, account balances and other chosen data into our budgeting software.

Another hindrance to a successful analysis of actuals vs. budget is the inability of most organizations to accurately forecast their balance sheet.  Not knowing what your forecasted balance sheet is going to look like throughout the budget process can severely impair your ability to anticipate changes to your organization’s financial health.  Find a budgeting tool that allows you to forecast your entire chart of accounts and gain insight into much more useful data than just the revenue and expense forecast.  Without an accurate, forecasted balance sheet, your budget process is incomplete.

If you do that, right after month-end close, you can quickly and effectively analyze your actual results against the budget data.  The advantages to doing this are considerable:  When you do this frequently and as soon as actual data is available, you are able to make decisions that will impact the organization’s future performance much quicker.  You may decide to adjust your forecast, or perhaps, re-align your operation in order to drive it more on course toward your budgeted and expected results.  Simply put, you are more equipped to deal with deviations from your original plan and goals.

To me, going through a tedious and stressful budget preparation process, without properly analyzing the actual results against it, doing it infrequently, or performing the analysis at a much later time after actual data is available, seems like a waste of time and resources.  There is absolutely no value going through this exercise unless you are going to use the results in a meaningful way.  Smart managements realize this and employ the right budgeting tools and resources toward achieving their goals.

 

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