Most people understand that time is more valuable than money. So how can you be sure that everything you're doing in your business is worth your time?
The decision to sit at your desk and review your numbers might be the last thing you want to do. Taking the time to look at reports may feel time consuming. However, a report that can help you make better decisions about how time is spent is an important one to look at.
A Profit & Loss Budget Performance Report can help you to make better decisions about how to use your time to improve performance during the next financial period.***
Here's how wrap your head around that...
First Thing's First: You Need a Budget
You might be spontaneous enough to vacation without a plan, but for a business, you always need a written plan.
Forbes reported that a landmark Harvard case study found the simple act of writing down goals helps increase likelihood of success by 82%. In your business, this plan starts with your budget.
Yes, businesses need mission statements with abstract goals, but the best run companies have financial goals like making money, growing at a certain rate, hiring, opening new locations, and expanding customer base. If you write these goals down it will increase your chances of success.
All you need to do is create a budget and budget forecasts for both worst-case scenario and best-case scenario situations.
The biggest problem is getting started. And fear is the reason business owners don’t start. They fear being wrong. What if I present a budget to the team and it's wrong? That’s the wrong mindset.
By definition, your budget is going to be wrong! You aren’t God. You can’t predict the future. So let go of trying to be right.
You need to start by creating something so you can get smarter every quarter until you understand the business model so it become automatic.
Why Your Business Needs a Budget
- Businesses without budgets lack unified direction and goals. That’s the single biggest reason why employees slack at work - they aren’t being challenged. Writing down a budget and cascading that down to helps align teams around common goals. This generates personal responsibility within individual roles and encourages discretionary effort among employees — especially when these above-and-beyond efforts are regularly recognized.
- Budgets change your management reports; actual results don't matter as much when you can't compare them to expectations.
- Budgets also provide leading indicators that reveal what's actually driving profits.
- Budgeting helps business owners better prepare for economic downturns, threats, challenges, upturns, and opportunities.
Now, Here's Where the Profit & Loss by Budget Performance Report Comes In
The Profit & Loss by Budget Performance Report lines up your forecasted budget alongside your actual numbers over a specific financial period.
This allows you to easily see what 'budget items' went as expected, which outperformed expectations, and which did not meet expectations. And you want to see the difference by dollar amount and percentage. At a glance, you can see whether you met, exceeded, or fell short of your financial goals for the time period in question.
Looking at this report with your management team, you can quickly see where you missed the mark and understand how you deviated from the original plan. Then you can then decide whether you need to adjust your forecast or make quick decisions to seize an opportunity or take action that will correct course before your business crashes and burns.
***With this information, you will be able to determine where to dedicate your time and your team's time going forward.
Transforming Budget Variances into Actionable Data in 5 Steps
Carefully assessing each line item on your P&L by Budget Performance will provide actionable data to help you and your team stay on top of your goals and ahead of the ever-changing market landscape.
1. Revenue Variances
Look at your total revenue, as well as individual line items (Are certain items generating more revenue or growth than others?). If revenue was more or less than expected, ask whether the variance is seasonal or a sign of a developing trend.
Consider reasons why you might have a variance and whether you need to take any action. If the numbers indicate growth or slowed demand, then do you need to hire more employees, put the brakes on hiring, or maybe look into additional research and development.
2. Cost of Goods Sold Variances
These variances include direct labor, direct materials, and other direct project costs. Consider why were costs were higher or lower than expected? If lower, is this due to decreased demand, indicating a possible downturn? If higher than expected, what happened? Did you change suppliers? Did you incur unexpected costs, such as hiring outside contractors?
What can be done to lower expenses in the future? Or, if expenses were lower than expected, did you use your free cash flow strategically?
3. Gross Profit Variances
Gross Profit is the profit you earned on the work that you did.
Did your business earn more or less gross profit % than anticipated? Whether you wind up with positive or negative variances in gross profit, first determine whether the variance is an anomaly or an indicator of a new trend before making business decisions and plans for your future budget.
If less, it's important to determine why, and make a plan to correct those errors going forward. You might also need to consider adjustments in your forecasted growth rate, as a smaller profit margin translates to less free cash flow to reinvest in your business.
If you earned more than expected, congratulations! Determine what generated the extra gross profit: was it lower costs, extra employee effort, increased market demand, or a stellar marketing campaign?
Distribute rewards and praise where due. Then, make a plan for reinvesting the extra cash.
4. Expense Variances
These “below the line” general and administrative expense variances include items like your "lights on" expenses, plus sales and marketing costs and research and development.
If you have variances in this category, it's important to look at the specific line items to determine what put the total general expenses over or under budget. Is it a one-time variance or have you incurred an increased recurring cost? Did you spend extra dollars in marketing or employee training? If so, what was your return on investment?
Adjusting Future Forecasts Based on Historic Performance
However you decide to take action based on budget variances found in your Profit & Loss by Budget Performance Report, you can adjust your future budget forecasts and growth projections on a quarterly basis based on actual performance and your course of correction.
Making these slight adjustments every time you look at your budget versus actual numbers will help you set clearer, more accurate goals for you and your team to work toward in the future.
But don’t worry about being wrong. By definition your budget is wrong. What you want is to keep getting smarter, every quarter, by studying the difference between the budget and your actual results. Then, you'll get better about budgeting the next quarter, and see - in real time - the impact of those changes on the drivers of your business.
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