Fixing your Annual Budget

You had a successful budgeting season and started 2021 with a board approved budget. Now it’s the end of Q1 and you spectacularly missed your numbers. How do you fix things? 

It’s not uncommon to create a 6×6 budget, that is, at the end of June create a new budget for the second half of the year because business has shifted so much. However, it’s not so normal to have to reforecast after 3 months. There are ways though you can correct things for future quarters and end the year on target.  

To understand the answer, first let’s step back and discuss proper financial reporting and cadence. There are 6 reports the CEO must see every month:

  1. The Balance Sheet: to understand your cash position, receivables, payables and in other words your working capital requirements. (this post won’t cover loans, equity, etc.) You’ll show a balance sheet as of Dec 31, 2020 vs Mar 31, 2021 plus a variance analysis for any significant differences.
  2. The P&L or Income Statement: to grasp how income and expenses are driving your profitability. Here you’ll show the month of March 2021 vs March 2020 and Year-to-Date March 2021 vs March 2020 plus a variance analysis for any significant differences. At this point you’ll also add in a reforecast every month. (see #3)
  3. The P&L reforecast: Take the Jan-Feb-Mar 2021 actual numbers and plug them into the budget. Now you have a new year end budget for 2021 based on Q1 actuals. Now I would compare this new reforecast budget with the actual budget for year end 2021 numbers and explain the variances again.

This re-forecast offers a less hands-on solution to a complete re-budget and can be done very easily by your finance and accounting team. The only time I would recreate the budget after the first quarter is if there is a pivot in the business model and everything changes. Otherwise, wait till June to do 6×6 re-budget. 

  1. Budget vs. Actuals: For March 2021 actuals vs. March 2021 budgeted numbers examine each significant variance and state an explanation.
  2. Profitability KPIs: Within three to five days of the close, look at all your invoices, revenue streams, and all the different items you can calculate on your own that’s cash-based, not accounting based, and determine your profitability KPIs. This could be revenue per consultant, time efficiencies on projects, etc. Every company has its own key indicators of success.
  3. Cash Flow Projections: Sit down every Monday morning or afternoon at a set time and walk through the cash flow statement with your CFO or controller. You need to understand what is coming in what is going out every week and have it forward-looking 16 weeks. If you’re low on cash in 10 weeks, at least you have ten weeks to right the ship. The key is no surprises.

You must receive your financial reporting packet every month. This cadence will prevent surprises and re-forecast might be the simplest course of action. If a re-budget is absolutely necessary so early in the year, so be it. You will have to reexamine your assumptions to be more or less conservative, reprioritize goals, and confirm the direction the company is heading. Whatever you decide, it’s critical to have a strong budget as it’s your blueprint for the business for the year ahead. 

A final note: every month your accountant will close the books ideally within 10-15 days of the end of the month. If it’s taking more than 15 days, I would question why and push to receive the financials so that information doesn’t start to get stale and prompt decisions can be made.


Today, we’ve barely scratched the surface

Whatever stage you’re at in business, you need to be all over the numbers. In posts like this, we aim to offer bite-size food for thought – but in a few hundred words, we can only do so much.

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