Monitoring and Modifying a Strategic Budget

This article is the second in a series on budgeting. In a previous article, we discussed creating a strategic budget. In this article, we discuss monitoring and modifying the budget. And in a forthcoming article, we will discuss overcoming common budgeting challenges.

Strategic budgets are not “set it and forget it” exercises. The figures should not be set in stone. In order to remain effective and relevant, the budget must be reviewed regularly.

Depending on an organization’s size and complexity, they should generally review their actual performance against their budget on a monthly or quarterly basis. This process is often called variance analysis and it’s a useful tool for figuring out where you are on track with your budget and where you are exceeding or falling short of your budget.

If market conditions or industry trends have changed significantly from when you developed your original budget, it’s ok to adjust the budget in light of this new information. Of course, you don’t want to fall into the trap of adjusting your budget frequently, or even worse – adjusting your budget to make your actual results look better. But, if there is a bona fide change in the conditions and assumptions that were used in developing the original budget, it can make sense to adjust the budget to keep it relevant.

One way that you can avoid the appearance of changing the budget simply to make your actual results look better is to report two sets of variances. In one variance analysis, compare your actual results to your adjusted budget. In another, compare your actual results to your original budget. The difference between the two should be easily explained by the change in conditions used to develop the budgets.

In addition to variance analysis, many organizations use key performance indicators (KPIs) to gauge their overall financial health and the effectiveness of the budget. Common KPIs in a business setting would include net profit margin, return on investment, and operating cash flow. Cash flows are also important in the nonprofit world, as would be the change in net assets, changes in restricted fund balances, etc.

Schreiber Accounting and Advisory has deep experience helping businesses and nonprofit organizations with their budgeting and other accounting, tax, and consulting needs. If your organization needs the assistance of a qualified CPA firm, contact the firm for more information.

Material discussed is for informational purposes only. It is not to be interpreted as investment, tax, or legal advice. Individual situations vary, and this information should only be relied upon when coordinated with individual professional advice.