Budget Vs. Actual
Many business owners and CEOs struggle to create and implement formal budgets because they feel the future is just too hard to predict. They also question if they will benefit from such an exercise.
Our CFO partners have implemented budgeting procedures for hundreds of companies. In every instance, the company and its managers gain a more clear understanding of their costs than before. They also gain clarity on what is expected from them in order for the company to be successful.
The most valuable part of reviewing budget vs. actual numbers each month is the variance portion of the analysis. Generally speaking, if the actual is within 5-10% of the budget, then there is no need for concern. This helps business owners and managers quickly spot variances and, more importantly, understand why the variances exist and what should be done about them.
In one example, one of our clients had never used budgets until we became their part-time CFO. When sales volume was less than 50% of the budget for the first two months of the year, the CFO began educating the owners that this situation would require serious attention immediately if the business was to survive through this slow time. Without our guidance, the company would have made no changes during the year and, as a result, would have lost a tremendous amount of money. Instead, we were able to quickly make adjustments, salvage a little bit of profit in that year, and we were much more profitable in the following year than we would have been.