Sticking to a budget can be one of the most crucial elements of success in any business, organization, or project.
But it’s equally important to be open to revising your budget at the mid-year point.
Knowing how and when to revisit your budget is a skill many business owners and managers overlook. As a result, they never make needed adjustments to their budget. This can cause long-term problems and put your business in a financial mess at the end of the year.
To help you avoid this, we’ve put together some tips and areas to focus on as you dive into revisiting your budget at the mid-year point:
Compare Your Budget vs. Actuals
First things first, you need to compare your budget to your actuals. Ideally, you’ll look back and make comparisons of where you are right now to where you were planning to be. Knowing how things have gone up to this point will help you make informed decisions moving forward.
A careful comparison will reveal how well you and others involved have been sticking to the budget. Any number of unexpected issues could lead to finances falling off course, both those within your control and those not.
Evaluate your budget area by area, sorting them into categories of:
- Overspent
- Underspent
- On track
With this information in hand, you have the basics of what you need for adjustments moving forward.
If you’ve significantly overspent in one area of your budget, allocate more for the remaining portion of the year. Ideally, this could come from places where you’ve discovered you’ve spent less than expected, helping keep the overall budget close to your original figure.
Dive Deep Into Your KPIs
Key performance indicators (often referred to by their shorthand KPIs) are the most important ways to track your organization or project’s finances. While they may vary from one budget to the next, here are a few of the most commonly used, and critical to understand, KPIs.
Customer Acquisition Cost (CAC)
Customer acquisition cost can be a huge part of any budget, as it underpins all of the future potential benefits you can receive from a customer. CAC measures how much your business is spending to earn the business of a new customer. Therefore, before launching any project or setting your budget and financial expectations, you should have the desired CAC that you believe you can achieve throughout the business, functioning as your KPI.
Knowing your CAC is extremely valuable for several reasons. For example, let’s say you sell a product to a new customer for $10 but need to spend $5 on advertising and other costs to lure them in. This $5 is your customer acquisition cost. If you can work on lowering your CAC, you can increase your profits without charging more or reducing production costs. Knowing your actual customer acquisition cost compared to what you expected it to be can help you make the proper adjustments to the budget moving forward.
Customer Lifetime Value (CLV)
Generally speaking, it’s much easier (and cheaper) to get a current customer to return for more business than it is to find a new one. While CAC measures how much it costs to get a customer “in the door,” so to speak, CLV is a metric of how much profit or sales you can expect to receive from that customer over the life of his interactions with your organization. Ideally, extending your CLV will lead to more revenue.
Your CLV ties in closely with your CAC. Your CLV will have to be sufficiently high enough to justify the expense of your CAC, or else you’ll lose money over the long term. As with customer acquisition cost, you should have customer lifetime value in mind when projecting the finances of a new endeavor or budget year. Then, when revisiting your budget, check how this CLV has lined up so far to see whether your assumptions hold up.
Accounts Receivable Days
The final crucial KPI to look at when reevaluating your budget mid-year is accounts receivable days. This is a measure of cash flow that usually only applies to businesses that send invoices or deal in credit rather than cash or cash-equivalent transactions. Accounts receivable days measures how long it takes to collect cash payments for items or services provided.
This matters when looking at your budget because while you may be doing a good deal of work, you may need to dip into other unrelated accounts to cover expenses if you can’t collect on them promptly. This can trigger a cascade of financial complications that could have been avoided had your clients or customers just paid up already! Knowing your accounts receivable days and working to lower that number is critical to ensuring adequate cash flow which greatly impacts your ability to carry out your budget.
Don’t Forget About Inflation
For the first time in a long while, inflation is making a major impact on budgets. If your initial projections didn’t factor in the steadily growing cost of goods and services, you’re likely to find yourself overspending your budget.
This is another area where reviewing your budget is invaluable going forward; you can see precisely where inflation has wreaked havoc on your organization.
With a persistent and insidious effect on your businesses’ finances, it’s better to be safe than sorry when it comes to inflation. Being overprepared can be a budget-saver in situations like these.
Call on an Experienced Accountant to Help Revisit Your Budget Mid-Year
As you can see, revisiting your budget is one of the most important things a business can do mid-year to ensure things turn out successfully going forward.
Use the data from your past spending and dig deep into your KPIs to calibrate your budget going forward.
This is one of those things that, while not easy, is crucial to get right.
Reach out to the experienced accountants at Pasquesi Partners, who have the knowledge and dedication to provide the help you need. Contact us today to get started!