Looking Back to Move Forward: Three Steps to More Effective Budgeting
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A budget is a forward-looking fiscal plan for a set period of time. Effective budgeting, however, is not as simple as anticipating what will happen next month, quarter, or year, particularly given the uncertainties we’ve dealt with recently.
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. What differentiates good budgets from mediocre ones requires the use of historical analytics. Historical analytics provide the perspective needed to factor in trends as well as recent changes in both spending and revenue.
Building an effective budget using historical analytics is not difficult. In fact, it can be accomplished using the following three-step approach:
Step 1: Compare Past Year’s Budgets to Your 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 positively or negatively? It may be that you can “sharpen your 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 process, you should have fewer items of concern throughout the year during your budget monitoring.
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? Areas that are increasing? Going forward, do you expect these trends to continue or change? How has the recent pandemic affected your revenue and expenses? Do you anticipate those impacts continuing next year? 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 developing 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 these analyses, you can combine the insights you’ve gained with requests from your budget managers, anticipated funding for new initiatives, and your revenue estimates, resulting in well-rounded budget. You will also be armed with insights that will enable you to monitor it much more effectively, understanding which areas may need a little extra attention, as well as which 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 throughout the year about why things might be happening differently than what was originally built into the budget.
Building an effective budget isn’t difficult, but it does rely on the ability to look back on the past using historical analytics.
Steve Miller is a Senior Product Manager for Forecast5 Analytics. Prior to 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