Is comparing budgets with actuals a bit of a waste of time?
The assumption that comparing budgets and actuals is really time well-spent often needs a bit of scrutiny...
In a nutshell: comparing budgets and actuals is pretty pointless unless the budgets were set very recently, in the light of recent performance and information. Comparing last month's actuals to a budget that was set six months ago is a waste of time. If you really want to compare something try comparing your last three months' actual figures with your next three months' projections. Or better still concentrate on spotting trends. That might tell you something useful.
A bit of time spent recently arguing the toss (sorry, respectfully debating the issues) with a client over the business of comparing budgets with actuals.
So here’s what I think. What you project in a forecast is based on a balance of two things : what has happened recently, and things you know about that might make the future different from the past. The relevance of actuals to the forecasting process is that they inform the future. That’s all. They’re now history. And because circumstances have almost certainly changed since you first projected what might happen the fact that they ended up different is of minimal interest. (As long as you know why, but you usually do.) So for most small businesses comparing actuals with any budget that was set more than a month ago is probably not a great use of their time. All they’re really saying is ‘back then, we didn’t know what was going to happen just now’ and I'm not sure that's news.
I think of it like this. If you want your business to move forward there are three basic steps:
First, always, a 'situation review'; the question: where are we now? What do we have? What do we owe? And a little analysis of strengths and weaknesses won't go amiss.
Then: where do we want be? Be clear; quantify it; set it out.
And third: how are we going to get there? Plot your route; make sure your plan is realistic, and that you’ve got the right equipment for the journey.
But then – and here’s the crucial bit - every now and again, stop and review the process again from number one. You have to say "where are we now?" as often as circumstances (and actual performance) have changed, and that's certainly not just once a year. Once a year is chocolate teapot territory. So once a month, or at the very least once a quarter, ask again: where are we now? If you’ve gone off course (as we so frequently do in business) you need to reassess.
If you’d planned by now to be at the foot of a mountain that you would need to climb, but in fact circumstances have led you to be on the wrong side of a fast-flowing river you’d be pretty stupid to get out the crampons and the ice-pick when you really ought to be inflating the dingy.
Which is the equivalent of relying on a forecast or budget that was set months ago and hasn’t been updated. If you don’t stop and review it frequently in the light of actuals it quickly becomes pretty worthless.
But it’s not just the relative pointlessness of the budget v actuals comparison per se that’s at the heart of this; the question comes down to how you spend your time. I’m not saying comparing budgets and actuals never has value. (If it's only to remind you how bad you are at predicting the future!) It’s just that in SME’s, resources for financial management are almost always scarce. You have to prioritise. Given the choice between spending time comparing your recent performance with a previous, already outdated view of your business, and comparing it with your current view of the short and medium term future, I know which I’d rather spend time on.