As we head into the last quarter of the year, your budget should not be sitting in a folder waiting for next year’s planning process. Now is the time to compare what you expected to happen with what actually happened. A budget is most useful when it helps you make decisions, not when it simply records your original intentions. Create a forecast from your Budget vs Actual for the remaining months of the year. Your forecast should combine your actual results to date with your best estimate of what the remaining months will bring. A budget and a forecast are related, but they are not the same financial tool.
Understand the Difference
Your budget is the financial plan you approved before the year began. It reflects the revenue, expenses, staffing, and other assumptions you expected at that time. Actuals are the results recorded in your accounting system. A forecast is your updated estimate of where your business will finish based on actual results and what you now expect to happen.
Do not change the original budget or revise actual transactions to make the numbers fit. Keep both as they are. Instead, copy the budget into a separate forecast, replace the completed months with actual results, and revise the remaining months using your best current information. The forecast should show what you realistically expect, not what you hope will happen.
Review Budget Versus Actuals
Review revenue and each major expense category. Look at payroll, benefits, rent, supplies, marketing, professional services, debt payments, and other significant costs. Identify the dollar and percentage variances, and then determine why they occurred. Was the variance caused by timing, a one-time event, or a permanent change? Will it continue through year-end?
For example, your revenue may be below budget because a customer delayed a purchase until next month, or because the business lost the customer. Those situations should not be reflected in the forecast the same way. Likewise, an expense may be over budget because of one large purchase or because prices have increased for the rest of the year. The explanation determines how you revise the remaining months.
Use the Forecast to Test Decisions
Once your forecast is complete, use it to make decisions. If your business is in financial need, review discretionary spending, overtime, contractors, inventory, subscriptions, vendor terms, and purchases that can be delayed. Model each proposed change in the forecast so you can see whether it will materially improve cash flow or profitability before year-end.
Consider the Employee Impact
Payroll is often one of the largest expenses in a business, so staffing will naturally be part of the discussion. Staffing decisions require the same analysis. Before terminating an employee, calculate the savings that will actually occur during the remaining months and include severance, accrued paid time off, unemployment costs, and the effect on productivity and customer service. A termination late in the year may improve next year’s results more than this year’s. Before hiring, include salary, payroll taxes, benefits, equipment, recruiting, training, and the time needed for the employee to become productive. The forecast will help you determine whether either decision changes this year’s financial picture enough to justify the operational impact.
Consider Healthy-Year Opportunities
If your business is financially healthy, this forecast can help you identify opportunities. Is this a good time to make a needed capital purchase, reduce debt, strengthen reserves, invest in technology, or complete deferred maintenance? A capital purchase affects cash immediately, while its accounting and tax treatment may occur over time, so discuss the timing with your accountant before proceeding.
You could also think about charitable giving. A year-end contribution can support a non-profit that reflects your company’s values and community priorities. Pedal the Cause is one nonprofit on my list. Confirm that the gift fits your cash position and discuss any tax considerations with your accountant rather than donating only for a potential deduction.
Finish With an Updated Plan
Your forecast should become a working management tool for the final months of the year. Review it monthly, update assumptions as conditions change, and assign responsibility for each action. The budget gives you the original target. Actuals show you what has happened. The forecast helps you decide what to do next. Whether your business needs to correct a financial problem or build on healthy results, timely decisions can improve your position before the year closes and help set the stage for an even better year to come. As always, seek advice from a trusted advisor who can help you evaluate the financial, operational, employee, and tax impact of your choices. n
Angela Piñon (apinon@stcpa.com) is the Outsourced CFO & Advisory Services Manager at Schmersahl Treloar CPA. She can be reached at 314.966.2727.