A: in a word: YES. Use this predicament to isolate what went wrong and learn from it so you can make a more realistic budget.
Start with a rigorous examination of the current budget against the actual results. Look at each month, as well as year-to-date totals. Take every line item and look at the differences, then examine what caused those differences. Were your projections off, or was performance better or worse than expected? Why?
Say sales revenue fell below budgeted levels (a common occurrence). Where did sales fall short? Were particular salespeople shy of their targets? Why? Do the same analysis by breaking down sales by product, territory, store, factory or whatever metrics you use in your projections.
Then analyse the cost of sales and the resulting gross margins on your products or services. Again, you should examine the budgets and results by the breakdowns that make sense for your business and point to actionable items.
Finally, do the same for all overhead expenses. Were your actual heating bills 20% higher than you budgeted for Winter? Did you over-use the air conditioner maybe in Summer?
Don’t skip analysis of cash flow. Were cash shortages driven by lower profits? Did collections slow down and inventories pile up?
Once you determine what happened and why, take another look at your original budget and determine which, if any, year-end targets are still attainable. Now you’re ready to build a new budget, along with an action plan to achieve it. For example, if your goal is to boost revenue and you decide to hire another team member, be sure to account for the time it takes to hire someone and for that person to ramp up, as well as the recruiting, training and additional compensation expenses that need to go into your new budget as a result.
Joe Worth – Magazine contributer – entrepreneur.com
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