The top sign your budget is bad

One of the clearest signs that your budget and forecasts are not very good?

After they’re produced, you never refer to them again – or only refer to them rarely.

Your budget and forecast should be living documents that help you manage your company more efficiently and successfully throughout the year. And they’re not just for your accountants to use – they’re for you, too, as owner of your company!

Here’s how we use these documents at Insight Associates…

Every month, we produce management accounts for our clients, giving them a snapshot of how their company is performing financially at that point in time. These monthly management accounts help them identify both opportunities and weak spots that they can address in the immediate future.

But the management accounts are not a stand-alone document. We always compare the actual performance of the company to the forecast we produced previously.

This allows us to benchmark where the company is financially, compared to where we thought it should be – which is extremely useful.

For example, if you turned over £130,000 in August, how can you tell whether that’s good or bad? It really depends on whether you were forecast to turn over £110,000 that month – or £150,000…

Even more importantly, when your company is diverging from the original forecasts, this exercise allows us to understand why.

You see, the budgets we produce aren’t just numbers on a spreadsheet. They’re more akin to a planning exercise, where we determine the company’s financial goals for the year and then plan exactly what actions are necessary to reach those goals. Getting to that point requires extensive discussions about the company’s structure, operations, market and people.

The forecast is the financial result the company will achieve, if all the steps we’ve outlined in the budget are taken.

When there’s a gap between the company’s performance and the forecast, the budgets allow us to play detective and to figure out what really happened…

Were there actions we outlined that weren’t taken? Did we do anything differently to the plan? Or were any of the assumptions in the budget mistaken?

In short, those numbers don’t exist in a vacuum. Because they’re tied to a business plan, it’s easier to identify what has gone wrong – or what’s gone very right!

And then we can either take corrective action, or do more of what’s delivering better-than-expected financial results.

That’s why your budget and forecast are so crucial. These are not just accounting exercises. Together with your management accounts, they’re essential tools to help you maximise your profit and grow faster every single month.

If your company currently doesn’t have those tools, get in touch with us today to find out how we can help you.

We work with ambitious companies turning over more than £1 million, to professionalise the way you handle your finances and to deliver the kind of financial management that corporates take for granted.

Not only will we help you create your management accounts, budgets and forecasts, but we’ll help you interpret them and use them to make the best possible financial decisions, as well. We become your financial partners, working closely with you to improve your financial performance, so you don’t have to do this alone but with financial experts by your side.

If that’s the kind of financial management you’re looking for to grow, get in touch with me today. Simply hit ‘reply’ to this blog or call us on 01279 647 447 to find out more.

Warmly,

Garry

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In this blog archive our Managing Director, Garry Mumford simplifies all things financial and shares with us a lifetime of practical financial business advice.

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