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It’s Not Too Late: Year-End Adjustments for Budget vs Actual Divergence

It’s getting late in the year and you have budget vs actual differences that are getting bigger and bigger.  You have questions: How did this happen?  Is it going to get worse?  What can I do about it?  

Take a deep breath and let’s back up.

  

Fundamentally, a budget is a financial representation of a plan.  This is very important to understand.  The spreadsheet is not the plan, it is a representation of a plan.  As the year progresses, it’s not uncommon to encounter a divergence between your budget and your actual financial performance. This is especially true in young, dynamic companies – because the plan changes or assumptions change.  Let’s take your questions in order. 

How did this happen? 

First, we should Conduct a Detailed Variance Analysis.

Perform a thorough variance analysis to understand exactly where the divergence occurred. Compare budgeted figures line-by-line with actual results to pinpoint where discrepancies are occurring. Break down the data into categories:  revenue, Cost of Goods Sold (COGS) staff salaries+taxes+benefits, other operating expenses (OpEx), and capital expenditures (CapEx) and identify which areas are underperforming or overspending.

Understanding whether the variance is due to external factors (surprises out of your control), operational inefficiencies, or budget errors.  This analysis is crucial for developing targeted solutions.

The second step is Reassess Your Financial Assumptions. 

Since your budget is a financial representation of a plan, go back and reevaluate the assumptions that formed the basis of your plan. Market conditions (sales cycles, prices, close rates), economic factors (vendor changes, tax rates, inflation), or internal changes (staffing levels, departmental spend, overhead), might have shifted since your budget was created. 

For instance, if your revenue budget was based on assumptions of your sales force achieving a particular close rate and sales cycle, and they have not achieved those targets, you may need to adjust your sales strategy. Similarly, unforeseen expenses or changes in costs could necessitate a revision of your expenditure plans.

Step 1: Conduct a Detailed Variance Analysis

Compare budgeted figures line-by-line with actual results to pinpoint where discrepancies are occurring.

Step 2: Reassess Your Financial Assumptions.

Reevaluate the assumptions that formed the basis of your plan and readjust your business strategies.

Is it going to get worse?

The best way to answer this question is to Update Your Forecast.

Adjust your forecasts to reflect the new reality of your financial situation. Create a new plan for the remainder of the year that incorporates the changes and addresses the gaps identified. Revise your budget.  This updated forecast should guide your decision-making and help you stay aligned with your adjusted goals.

What can I do about it?

 

Once you’ve identified the causes of the divergence, and you have a new plan, Implement Adjustive Actions

Don’t wait.  Immediately take corrective actions to realign your business with your new plan and budget. This might involve:

Cutting Non-Essential Expenses

Review your spending and identify areas where costs can be reduced without compromising essential operations.

See Managing Costs

Boosting Revenue

Explore opportunities to increase revenue, such as promotional campaigns, new product offerings, or optimizing pricing strategies.

See Maximizing Revenue: How to Leverage a Pricing Change for Greater Profit

Reallocating Resources

Adjust resource allocation to ensure that critical areas are adequately funded while less critical areas see reduced investment.

The second thing to do going forward is Monitor Closely and Adapt.  Continue to monitor your financial performance closely as the year progresses. Quickly close the books each month and compare actual results to your revised budget to ensure that the corrective actions are having the desired effect. Be prepared to make further adjustments if necessary, and stay agile to respond to any new developments or challenges.

Final Thoughts

Be sure to Communicate with Stakeholders.  Communicate the changes and the rationale behind them to stakeholders, including team members, investors, or board members. Transparency helps maintain trust and ensures that everyone is on the same page regarding financial expectations and strategies.  You would be surprised how much support you will receive if you keep them in the loop often and early

Also, use the experience as a learning opportunity to improve future planning processes. Analyze the planning process itself:  Who was involved?  How did you set your goals?  How did you develop strategies and Objective Key Results (OKRs) to achieve those goals?  How did you build tactics and assumptions and align those with the resources you have?  What Key Performance Indicators (KPIs) were you going to use to measure success and how could those be set to be leading indicators rather than lagging indicators?  

By taking these steps, you can effectively manage plan deviations and steer your financials back on course, ensuring a more stable and predictable outcome by the end of the year and have a better plan for next year.

Want our expert opinion on your budget vs actual divergence?