A lot of work goes into budgeting and forecasting, which may be why many businesses choose to only tackle the job once a year. However, many financial experts agree that budgets are rarely perfect and often need to be adjusted much more than annually. The reality is that increasing budgeting frequency (read: more than once per year) can be highly effective and can help you gain a competitive edge.
The Benefits of Ongoing Budgeting
Suppose a couple of months after you finalize your annual budget, your cost of goods increases by 10%. Clearly, this increase is going to have a domino effect throughout your business, impacting everything from profit margins to operating expenses and even salaries.
Making an adjustment to your budget sooner rather than later can help you mitigate the impact of this unexpected increase and maintain profitability. Otherwise, issues like a 10% increase can slip through the cracks and create major financial havoc over the rest of the fiscal year.
Things like shifts in consumer preferences, supply chain sourcing and brand reputation can all create similar effects. When you review your budget more frequently, you can better identify and respond to these changes before they become bigger issues that are harder to recover from.
How to Conduct Budgeting Sprints
Once you set an annual budget, you don’t have to reinvent it from scratch each time you review it. Instead, focus on the following action steps:
Review Previous Forecasts
Revenue performance only tells part of the story. It’s important to compare revenue to the assumptions that previously led to your budgeting decisions to get a clearer picture of your progress.
For example, suppose you based your budget on getting 100 new clients a month at $100 each. Assume 10% of customers will churn each month for a net gain of 90 new clients. When reviewing your actual financials, you can determine whether you’re truly gaining 100 new clients, whether 10% are churning and whether your revenue aligns with a 90-client gain.
If things didn’t turn out the way you planned, now is an opportunity to learn what went wrong and adjust your budget accordingly.
Maybe you overspent in a certain category or maybe you didn’t get as many clients as you’d budgeted for. Whatever the reason, increasing budgeting frequency can help you detect these issues so you can shift your priorities. Look at how much cash you have on hand and how quickly you’re spending. In some cases, you might not be hitting targets because you aren’t spending enough in certain areas, like marketing for example.
How the Right ERP Solution Supports Increased Budgeting Frequency
Business budgeting is full of uncertainties, but an ERP solution can help bring clarity to complexity. An ERP helps increase visibility into your data, automate critical tasks and ensure forecasting accuracy, all of which can help drive better budgeting decisions. To learn more about how ERP can help streamline business budgeting, reach out to us. We’d love to chat.