3 Reasons your budget is not static

This summer the Pacific Northwest has been smokey. Each morning, the weather report includes the smoke forecast, providing an indication of whether the smoke is going to stay high or be lower to the ground, be blown a certain direction or just sit at a high AQI level. Once that forecast comes out, you can guarantee that something is going to change. The smoke levels are variable based on the specific hill or valley you live in, how close you are to the water, and many other factors. Planning your day based on the smoke forecast at the start of the day is largely unreliable because factors change by the hour.

Smoke forecasts are the result of devastating wildfires and no one wants to suffer through a horrendous wildfire season. The forecasting process, however, reminds me of budgets in our business. No one wants to suffer through budgeting knowing the forecasts are constantly changing and rarely accurate. 

You may have started your year off with a solid budget in place based on strong expense assumptions and a predictable pipeline.  Meanwhile, your costs have been shifting throughout the year, your actual revenue is coming in differently from what you projected, and your pipeline for the next quarter looks nothing like it did when you built the plan. The budget stays frozen while the business keeps moving.

A budget that isn't revisited isn't a tool anymore. It's an artifact. It is a static spreadsheet telling the story of what your business was back then.  

Here are the three reasons your budget should never be treated as a static spreadsheet: 

1. Your Expenses Are Never Fixed 

A budget line item can feel permanent the day you set it and be out of date three months later. Software vendors raise prices. Insurance premiums renew higher. A contractor's rate goes up. A new hire increases your payroll. While none of these as standalone items may have a big impact on your budget, added all together the numbers you need to hit your profit targets have shifted dramatically. 

If you only review expenses once a year, you will find the end of year review could be painful as you realize you will not be able to pay yourself what you need or bonus the team they way you hoped. Treat any material cost change as a reason to open the budget and evaluate the impact it has.

2. Revenue Data Informs Decision Making

When you get your revenue number each month, do you take note and move on, or do you add it to your plan to see how that impacts the bottom line and how it adds to your trend lines? If your revenue is consistently beating forecast, you may need to make investments to support that growth. If revenue is falling behind, you may need to start planning for changes, or shift a sales strategy. 

Reviewing your revenue trends against how you forecast and budget allows you to make more informed decisions about how you are running your business. You will be better prepared to make changes in your business, whether that is investing or cutting, if you are watching how the revenue is flowing compared to what you planned.

3. Forecasted Revenue Shifts the Plan

Often budget updates happen when things have already happened. The money is in the bank, the books are closed, or the employee has already transitioned out. However, evaluating your budget against what is forecasted and not yet in the books can help you plan. If a client signs a bigger contract than expected, a big project gets delayed a quarter, or a for-sure prospect pulls out of the deal, the impact on the budget is real. 

Monitoring your forecasted revenue as your pipeline changes can shift how you plan your spending. Updating your budget based on these variables will ensure you are not making commitments that you cannot afford and that you are spending where needed at the right cadence. 

It is all about updates, not re-writing

Acknowledging your budget is not static does not mean you need to overhaul it monthly. It means including a review when you review your financials and sales pipeline. Simply assess:

• What expenses changed? 

• How does actual revenue compare to forecast? 

• Has what I expect to happen next quarter changed? 

Typically, the adjustments are small. They are course corrections that are easier to adapt to, and prevent big, harder to handle issues annually.  

Budgets are not meant to be a document you finish and forget. They are meant to be a tool you keep using and leveraging to ensure you are achieving your business goals.