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The Official Blog of Forecast5 Analytics

Steve Miller
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Steve Miller

Benchmarking, Budget, Data Visualization, Forecasting

Budgeting – You Can’t Look Forward Without Looking Back

Posted on Apr 24, 2017 9:43:40 AM

A budget is a forward-looking fiscal plan for a given period of time.  Good budgeting, however, is not as simple as “what do I think will happen next month/quarter/year?”  What differentiates good budgets from mediocre ones isn’t just how close the actual results are to the budget, but also how easily the budget is monitored and communicated throughout the year. Building a budget you can live with on a daily basis requires the use of historical analytics. Simply taking last year’s budget and cutting a few percent or, if you’re fortunate adding a few percent, is not going to make for a strong fiscal plan.

Step 1:  Compare Past Year’s Budgets to Actuals

The first step in building an analytics-based budget is comparing past years’ budgets to actuals.  Are there areas where actuals have typically missed budget; either positive or negative?  It may be that you can “sharpen the pencil” in some line-items and take out contingencies that you rarely need to access.  Conversely, there may be hard-to-control line-items where you need to build in more cushion.  By going through this exercise during the budget building, you should have fewer items of concern during your budget monitoring throughout the year.

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Step 2:  Look for Upward and Downward Trends

The next step in the process is looking for upward and downward trends in significant line-items and analyzing the magnitude of those trends.  What have been the largest growth areas of your budget over the last 3-5 years?  Are there areas that are shrinking?  Going forward do you expect these trends to continue or change?  With this information, you can adjust your expectations for the coming year.

Step 3:  Look at Your Current Year’s Budget

Lastly, and most importantly, how is the current year going?  Budgeting budget-to-budget or last year’s actual-to-budget misses the most timely and relevant data.  You may want to begin your budget for the coming year midway through the current year.  Perform an analytical review of your year-to-date numbers at that time.  Are most line-items at 50% of budget?  If not, why not?  Are they not spread evenly throughout the year, or are unexpected factors impacting your current performance?  With this knowledge, what do you forecast your year-end results will look like?

Once you have performed all of this analysis, you can combine it with the requests from your budget managers, your new initiatives and your revenue estimates to have a much more well-rounded budget.  You will be prepared to monitor it much more effectively, knowing which areas may need a little extra attention as well as what areas you may want to highlight at your budget hearing/adoption meeting.  Lastly, you’ll be much better informed and more able to easily respond to questions about why things happen differently than the budget throughout the year.

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Steve Miller is a Senior Product Manager for Forecast5. Before his current role at Forecast5, Steve spent the 20 years working with school districts and other local government clients as an external auditor, school business official and consultant focusing on long-range financial planning.  Steve is a CPA and CSBO with a Bachelors in Accounting from the University of Illinois and a Masters in Education Administration from Northern Illinois University.

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