Effective financial management is crucial for any business, and creating a budget is a fundamental step in achieving financial success. A budget is a plan that outlines expected income and expenses over a period of time such as monthly, quarterly, or annually. Budgets can also  include different categories of income and expenses such as income from employment, investments, or rental properties, and expenses like rent, utilities, supplies, entertainment, and savings.  By creating and following a budget, businesses can gain better control over their finances, make informed financial decisions, and work towards their financial objectives.

Variance Reporting

Budgeting season usually occurs during the last quarter of the year.  The prior year’s performance is considered, as well as the strategic objectives for the upcoming year.  As the new year begins, the budget is referred to often as decisions are made regarding expenditures, hiring, etc.  After the end of that first month, it is important to create a variance report to show your performance during the month compared to your budget.  You can then compare the actual performance in each revenue and expense line item to your budget.  Any significant variance should be researched if the reason for the variance is unknown.  Sometimes it may be as simple as an accounting error!

A Budget Is Never Perfect, But Outside Of Any Extraordinary Events, The Variances Between The Actual Performance And The Budgeted Performance Should Be Minimal.

Analyzing Variances

  1. As the year progresses, we recommend looking at your variance report in a few different ways.
  2. Compare your monthly performance to the budget for that month.
  3. Review the year-to-date (YTD) performance compared to the YTD budget.  Certain revenue streams or expense items may be paid quarterly or semi-annually.  Some revenue items may not hit your books every time each month, so if you are only looking at your monthly performance, the results may look skewed.
  4. Compare your performance to the same time period the prior year.  Some business industries are cyclical, and income may be extremely slow in the first quarter of the year, compared to the second and third quarters.  If your budget does not reflect the industry cycles, your variances between actuals and budgets may vary significantly some months.  Comparing each month to the prior month last year will smooth out those variances.  Looking at your YTD actuals compared to YTD budget will also help smooth out the variances.

Reviewing & Revising Your Budget

Now that the first quarter has ended, it is important to review your budget and compare it to actuals.  Has something significant changed?  Are you meeting your financial objectives?

A Budget Is Not Meant To Be Permanent.

New opportunities, economic environment changes, and management changes are all examples of activities that give way to budget revisions.  This is okay and necessary.  Some organizations revise their budget quarterly.  As long as your budget continues to guide you towards your overall objective, you are on the right track!

Creating and following a budget is essential for businesses to achieve financial success. By using a budget, businesses can make informed financial decisions, gain better control over their finances, and work towards their financial goals. If you need help creating or managing your budget, seek the advice of a financial professional.

If you find yourself struggling to effectively use the budget that you create each year or create a budget at all, contact us today.

Tax Strategy & Planning + CFO Advisory Services
= Perfect Alignment

Cessie Cothran

MBA Director of Advisory Services

Combining the CFO Advisory with tax strategy creates the best opportunity for financial success. We like to call it being perfectly Aligned. Our clients know they have us as a partner, helping them to feel secure about their financial future.