BUDGETING FOR THE
NEW YEAR – 5 KEY TIPS
What can your business do in January to improve all of 2023?
A budget isn’t just about planning for potential expenses or tracking results – it’s about providing a tool to actively manage your business profitability, month-in and month-out. Here are some key tips to help your business in 2023:
Budget vs. Actual
An important structure of your budget is to track “budget vs. actual” (as opposed to this year vs. last year). This helps to manage the finances of your business accurately and strategically. By analyzing the monthly differences between your agreed-upon budget and the actual amounts out in the field (i.e., your “variance), management can catch financial issues early on and develop solutions before they become bigger problems.
The “budget” column is the predicted amount based on strategic objectives tempered by historical income and expenses, while the “actual” column reflects real data. Whether the variance between the two is minor (i.e., due to unforeseeable variations in spending and financial activity) or significant (which should generally lead to immediate actions), management will be able to review and then take efforts to adjust operations in order to meet profitability goals.
Variances in expenses can be caused by several factors including: materials/services market dynamics (e.g., raw materials costs), labor costs (i.e., mismanaged overtime), and machinery and equipment (breakage/repairs and replacement). By knowing the difference between your projected budget and actual spending, management can:
- Improve financial reporting capabilities
- Determine causes and take actions to improve future results
- Reduce risk in corporate finances
On the income side, variance analysis can sometimes generate surprising results. You may find that a sudden drop in certain customer segments that wasn’t detected, or identify growth opportunities to take advantage of in the future.
5 Steps to a Better Budget
There are several steps that any business can take to make the budgeting process more effective. Here are five that MyCFO has found to be helpful:
- Check industry standards (i.e., comparative data from similar size companies in your field) to see how you can improve performance.
- Involve employees (gain their input and commitment)
- Define and understand risks (i.e., strategically considering key factors that could adversely affect performance)
- Anticipate your sales cycle and cash flow
- Constantly revisit your budget (at least monthly, more frequently depending on your business dynamics)
Recent Engagements
See our related article on “Budgeting for Maximum Profit!” to see how MyCFO assists clients with budgeting – and how we can help you!
Planning for Success
Successful businesses create annual budgets and regularly monitor performance. Would you like to take steps to make 2023 a profitable, successful year for your business? The professionals at MyCFO can offer invaluable expertise in the budgeting process. Contact us today for a free initial consultation!