Starting your budget can be one of the toughest tasks to accomplish by year-end along with everything else on your plate needed to ensure a clean and accurate close of the fiscal year. There is never enough time to gather what you need, collect from others what is necessary, or find the time to fit it into your calendar.

A reactive approach to a budget can be stressful, daunting, and overwhelming when you have little time to prepare and subsequently produce. If you are feeling as though you are missing something, you probably are. If you feel like you just checked a box on the “to-do” list rather than accurately depicting the result of planning, you probably are. Many experts say your budgeting can take at least three months to build, edit, and formalize. Here are a few tips to assist in a proactive structured timeframe for working on your annual budget.

Work consistently and look ahead

First of all, you should work on your budget year-round. A budget doesn’t stop at approval. Rather, you can maintain gathering information all year long while filing it in a safe place for future use. What type of information would you gather/track year-round? Information such as notifications from vendors on the sunsetting of a product. Generally, these notifications come 12-18 months in advance and have a potential impact on future planning such as equipment that can no longer be serviced due to parts availability or regulatory necessary upgrades.

Additionally, make sure to eye your contract renegotiations. Do you have contracts up for renewal that may impact future fiscal year budgeting? Contract negotiation for some products and services can take up to 18 months or more to compare, contrast, and complete a vetting process. Having this information handy is especially important when the potential for transitioning could be in stages and spread over a period that could overlap budget periods.

Changes come with notification to patrons, programming costs ahead of time, and otherwise “unknown” or “unexpected” expenses. It’s a good idea to understand the timelines and potential costs involved. This even allows you ample time to ensure you have provided a non-renewal notification to ensure that those contracts with auto-renewal clauses, do not renew.

Adjust or recast

A budget is a projection at a point in time with data that is a best guess based on expected results. These assumptions are produced with good intentions based on planning and goal setting that in a controllable environment should prove to be beneficial and on the mark. The reality is that your business is always in flux and in no way do you or anyone have “control” over the economy, natural disasters, or as in past years, a pandemic.

Factor in the other “controllable” costs such as the reallocation of funds due to a shift in planning, vendor price increases, and the skyrocketing cost of employment. Often, organizations think that once the budget is set, it is set. That isn’t true and there are options should your organization choose to utilize them.

Option #1: You can choose to ride the storm and adjust existing goals to accommodate for the unexpected as opportunities arise or

Option #2: Produce a recast of your budget based on new information related to those unexpected changes.

Adjusting existing goals is simply shifting allocations around with your current budget to get the same result, from increasing production in an area that is now suited toward economic environment shifts to looking for ways to increase or decrease income or expense to reach your ultimate net income goals. Your options for consideration could include the following:

• Evaluation of fees for services rendered and how they now fit your business needs within the change of environment. Do your fees still fit your model?
• Are you missing an opportunity to market a product that has been sitting on the shelf for a while, that with a little tweaking could produce a new and improved product in your offerings?
• Prioritize identification of areas of improvement to cut expenses to ultimately maximize income. This can be done by eliminating unnecessary expenses, understanding existing product profitability, and revisiting those products and services that are no longer of value to you or your organization but require allocation of expenses.

A recast budget refers to simply “forecasting again.” It’s when you need to re-create and/or adjust your budget due to unforeseen circumstances occurring or when you are veering off the original track. One option focuses on adjusting your actions to fulfill the original budget forecast while the other re-writes the budget based on new information. Knowing when to recast a budget could include examples such as:

• Change in business or operational goals (new location, closure of a location, merger, changes to leadership, etc.).
• Economic and market changes within an organization, country, geographical area, or period.
• Lawsuit or otherwise extraordinary income or more likely expense.
• Misallocation of productivity or performance of products sold or investments made.

Key performance indicators

Create and utilize Key Performance Indicators (KPIs) when evaluating performance with your budget. Key performance indicators provide a focus for strategic and operational improvement. They create an analytical basis for decision-making and help your organization focus on what is most important to your success. Tracking your progress towards specific goals will assist in informed decision-making to improve the outcome and, in the end, create an accomplished budget.

KPIs should be Specific, Measurable, Achievable, Relevant, and Time-Bound (SMART). They can be set by utilizing peer information or based on your growth targets against those in your peer group. There are two types of KPIs: forward-looking and those that reflect past performance. Depending on your organization’s goals here are some forward-looking KPIs for consideration:

• Sales (sales goals) and marketing (website, click-through rate, social media presence, net promoter score, etc.)
• Human resources (employee productivity, cross-selling success, etc.)
• Customer service (customer satisfaction, retention, etc.,)
• Strategic (big picture: ROA, net income, ROE, and market share)
• Growth and expansion (net asset growth rate, operating income margin, capital utilization rate, etc.)

Lagging Key Performance Indicators are used to learn lessons from the past, offering certainty based on events that have already occurred. They serve as a measuring tape to allow you to set benchmarks (industry standards) and then reveal areas for improvement based on gaps between the benchmarks and your organization’s performance. It provides a sense of where you have been rather than where you are going or want to be.

A budget is not meant to be a “set it and forget it” process. It is important to spend the time to understand the variance in your budget early in the fiscal term to better prepare you for what is to come. KPIs will assist with this process and arm you with the information you need to be successful. This constant oversight will prepare you for the obstacles you see coming or where you may have otherwise not been accurately depicted.

When selecting Key Performance Indicators, it is important to choose KPIs that matter most to your organization to ensure you are measuring what is important to you and your success as well has understanding how to move them in the direction you want. Iterate your KPIs with your team to ensure they stay current based on market, customer, and organizational changes. Meet often with the team and review for potential adjustments.

Reflect, review, revise

A budget on paper is just a budget on paper. A budget with actual vs budgeted observation on past and future projected and expected performance is a budget with accountability, direction, and most certainly, success.