It’s Time To Reforecast Your Budget

Aug 1, 2022 | Management, Peer Groups, Strategy

With your books closed on the first half of the year, it’s time to reforecast your budget.

I bet you wish you had a crystal ball, so you could see what the second half brings??

Show Me Your History, And I’ll Show You The Future

At the beginning of the year you (hopefully) set an aggressive budget for making good profit, e.g. 20% after straight-line depreciation as a residential firm, up to 15% for commercial.

(Note, some divisions will strive for even higher net margins.)

And now that you have closed the books on your revenue and profit for Q1 and Q2, many of you can see that there is a gap.

The gap comes from many places:

  • A slow start in the spring
  • Bad weather be it rain or drought
  • Material costs not matching contracts
  • Rising fuel expenses
  • A hiccup in hiring, be it H2B or labor market troubles
  • A situation unique to you, like losing a big client

Rely On Data

Sherlock Holmes said it best, ‘“It is a capital mistake to theorize before one has data.”

You must rely on facts and numbers (not your gut) as you reset your budget. 

Use consistent calculations between the original budget and the new budget, so it’s apples to apples.

To do that, you must use “accrual based accounting.” 

I have seen that some people confuse invoiced with accrual. Make sure you have it right.
You must rely on facts and numbers (not your gut) as you reset your budget. Click To Tweet

The Two Gaps 

The gaps you uncover can be in revenue or in expenses.

Revenue gaps are easier to see, as long as you are using accrual accounting, which helps you account for things like: deposits, maintenance payments, and work-in-process.

Expense and profit gaps are harder to see, because it requires accurate revenue plus accurate materials, subs and other expenses.

Can the gaps come from timing? Generally that means you are following a cash budget, and not accrual.

But the gaps can come from a significant drop in capacity, which means you need a brand new budget for the second half of the year.

Finish Strong

This is a mindless expression that generally means work harder. 

As if the first half of the year you didn’t work hard enough ?!

But in this context, it means work smarter, starting with an accurate reforecasting, and ending with a new set of goals.

Your new goals will be company wide and by division, for example:

  • Sales
  • Sales Margins
  • Revenue
  • Capacity
  • Billable and Non-Billable
  • Throughput
  • Efficiency

By hitting your new goals you will finish stronger.
The term, Finish Strong, is a mindless expression that generally means you need to work harder. Click To Tweet

Your Challenge: Reforecast With Your Team And Get Their Buy-In

You can’t do it alone!

As a long time peer group member, Donn Vidosh, emailed me this week and said, “We are working on bonus payouts for next week which includes sitting down with division managers to reforecast the second half. This exercise is so valuable because it gives us all a target (with divisional sub goals) we can now push from top to bottom and assign specific goals down the org chart.”

If you are doing open book management or profit sharing, then involving your people in this exercise is twice as valuable.

Show your team where your gaps are now. Don’t hide them out of embarrassment or misplaced leadership. It will backfire.

You got this!

Regards, Jeffrey

P.S. Ping me if you want help. Proper budgeting and forecasting is one of the skills we cover in our Leader’s Edge Peer Group.

You may go quicker alone but only temporarily; you will go much father together with us.