Last week’s blog talked about building a budget you can use as a tool to grow profits and control expenses. So, you have your 2016 budget. What’s the key to turn it into an effective management tool?
The key is comparing your budget to your organization’s actual financial activities to see if budgeted financial goals are being achieved. If not, it’s an opportunity to make the necessary changes to stay on course during the year. It’s too late in December.
Following these three steps will help your organization make sure that financial goals are being met all year long:
1. Set Expectations
Responsibility and processes for comparing financial reports to the budget should be assigned and documented. Establishing expectations for financial oversight highlights the importance of this activity. Financial reports for the budget comparison should include a current month and year-to-date income statement and a balance sheet for the month-end with prior-year comparative data.
2. Take Action to Stay on Course
It’s not necessary to review every financial line item. Only significant line items and variances between budget and actual over a certain amount (e.g., +/- 10%) should be reviewed in detail. Explaining the root cause of variances often indicates the corrective action that is needed to stay on course to meet budget goals.
3. Track Progress to Achieve Results
Document the financial oversight review of budgeted and actual activity, as well as any resulting decisions and actions. Capturing the review and actions taken will help to track progress throughout the year toward meeting financial goals.
Regularly comparing the organization’s budget to actual financial activity is worth the time and effort. It helps organizations to determine whether budgeted financial goals are achieved and provides an opportunity to make any changes needed to stay on course.