Performing a year end budget review

The end of the year usually has business owners thinking about taxes. But, while year end tax planning is certainly important, conducting a year end budget review is also critical.

With the economy continuing to keep you presumably wary, if not outright worried, keeping a close eye on every dollar coming in and flowing out has never been more important. So how did you do? Were you able to keep all (or most) of the numbers in line? Or are you headed for trouble?

A year end budget review can help you answer these questions and perhaps others that are weighing on your mind.

Starting at the bottom

Generally, a business budget will have three primary components: an income statement, a cash flow statement and a balance sheet.

The income statement typically shows sales, margins, operating expenses, and profits or losses. And because, like many business owners, you may naturally be drawn to the profit part — otherwise known as the bottom line — let’s start there.

The key details to focus on here are, obviously enough, whether you’re operating profitably. If it looks like you will post a profit this year, determine what you did right and whether you should pursue these actions more aggressively or take a “hold steady” approach.

And if you anticipate a loss year, ask a similar question: Should you actively try to pull your business out of its current financial predicament or should you dig in and wait it out by staying within your margins and controlling operating expenses?

Getting into the flow

In terms of pure survival, the most important part of a budget review may be an examination of your cash flow statement. A typical cash flow statement comprises three sections:

1. Operating activities (associated with running the business),
2. Investing activities (associated with growing the business), and
3. Financing activities (associated with obtaining money).

After looking carefully at all three sections, check to see whether you have as much available cash as you expected to when you set up your budget. A number of things may have thrown off your earlier projections.

For starters, there’s the question of taxes. (This is where tax planning and a budget review can be a useful joint activity.) Often, businesses hold funds allocated for income and other taxes for an interim period until a payment is made to the appropriate governmental body. If these funds aren’t clearly marked as such, you may overestimate available cash.

Have you made any major asset purchases this year? If so, such a transaction could have major implications on whether or not you’ve stayed within budget. Maybe you absolutely had to buy a new piece of equipment after the old one failed, or you had to allocate amounts due from customers toward purchases before those funds were actually collected.

Another important thing to look at in your year end budget review is spending variances. When departments over- or underspend against budget goals, the reasons often go unchecked.

Putting it all together

As mentioned, the third element of a business budget is the balance sheet. After looking at your company’s profitability and its cash flow, use this document to get a sense of the financial condition of your business on the date you prepared your budget to compare it against its current financial condition.

For instance, perhaps you’re seeing substantially more debt on your balance sheet than you anticipated. In this case, you’ll likely need to curtail discretionary expenses (such as bonuses) in your budget and create a plan for paying off or refinancing that debt as quickly as is reasonably possible.

When delving deep into the numbers, however, don’t lose sight of your company’s goals. If a particular item on your budget never really “paid into” your business objectives for the year, maybe it’s time to eliminate it. On the other hand, if an item is delivering significant value — especially in comparison to cost — figure out why. Could you get even more from it by raising the activity’s allocated dollars, or is it fine as is?

Perhaps the easiest way to get a sense of whether your budget served its purpose over the course of the year is to dig out your business plan. Draw on your mission statement and business plan to determine whether you’ve won or lost the budget battle this year. Sometimes a budget review may prompt a revision of either your mission statement or business plan (or both). But undertake any such change with caution, as drastically altering your company’s chosen course can be a risky maneuver.

Keeping up

You’ve kept up with your annual budgeting process, right? Don’t beat yourself up too much if you haven’t. Many companies — particularly small businesses — lose sight of budgeting as the years fly by and the struggles to stay successful mount. But, as mentioned, today’s economy warrants not only creating a budget, but also reviewing it monthly and annually and using it as one of your primary strategic tools.

Cost-control management: A budget’s best friend

If your company comes up overbudget year after year, you may want to consider cost control management. This is a formalized, systematic review of operations and resources with the stated goal of reducing or at least controlling costs at every level. As part of this effort, you’ll confront issues such as:

Operational efficiency. Cost-control management can help you clearly identify activities that are running smoothly and staying within budget from the ones that are constantly breaking down and consuming extra dollars.

Procurement effectiveness. Maybe you’ve bought the same types of materials from the same vendors for many years. Are you really getting the most for your money? A cost-control management review can help you look for better bargains on the goods and services that make your business run.

The technology factor. At this point, just about every business process has been affected by technology in one way or another. But, in some cases, companies overspend on technology that’s not really necessary and, in other cases, they’re missing out on ways to automate or augment an activity with the right tech tool. Cost-control management can help you decide whether to simplify or upgrade.

Please contact Feeley & Driscoll's Boston Accounting team by Email or call us at 1 (888) 875-9770.

related links