Before your fiscal year began you went through a full planning process, creating a business plan and the detailed budget (including anticipated revenue and expenses) that goes with it. But if you’re not sitting down once a month to compare actual results to projections, that budget is not doing you much good. In fact, you’re missing out on these 5 key benefits that monthly budget monitoring can provide:
1. Gain a clear understanding of where things stand – Ensure management can clearly see both problems and positive trends in real time, rather than being surprised at year end. In comparing actual to budget, look to see if revenue and expenses are in line with your plan and in line with each other. For example, if your revenues dipped by 10% versus budget, did your variable expenses drop as well?
It’s also important to look at sales by product line and anticipated seasonality. If revenues are way ahead of budget due to the unexpected success of one highly seasonal product, what will things look like when the season ends?
2. Hold sales accountable for performance – If they’re exceeding budget, the sales team should be getting public recognition as well as increased commissions. If sales are off, the sales management team will know they need a new game plan to get on track.
3. Avoid cash flow problems – Any variance from budget can impact your cash flow and cash flow forecast. While dips in sales create obvious problems, unanticipated increases can, too. For example, if sales soared to 35% above the projected level, would you have the resources in place to support it. ?
4. See where your staffing levels should be – For manufacturing and operations, be sure to compare actual labor and materials with what was expected, and then compare this with sales to see if things are correlated. Variations may suggest the need to change your investment in raw materials or adjust staffing levels, such as by adding an additional shift.
5. Identify issues with your cost of goods sold (COGS) – Even if you’re on target with your overall revenue figure, if your COGS is higher than expected for this level of sales your gross profit will still be down.
The bottom line is, monitoring your budget on a monthly basis will give management a clear understanding of the current month’s results, how the company is performing year to date, and whether you’re ahead of the game or falling behind.