A budget review & correction may be in order

Edmond Life & Leisure - Tony Scott

Mar 22, 2022

Reviewing and correcting your budget for 2022

You wrapped up year-end 2021 and now you’re taking a breather. But you can’t get too comfy because it’s time to focus on accomplishing the new year’s strategic objectives you established for your business. That’s where your annual budget comes in.

Budgets, unlike financial forecasts, typically aren’t revised once they are set. But a budget review and revision can be appropriate when conditions exist that misalign your budget with today’s market realities.
What factors justify a budget review and revision?

Large corporations often go through a budgeting process in the third quarter of each year, with each department nailing down their expectations for the following year. Small and mid-sized companies can counterbalance having fewer eyes on their plans by systematically reviewing budgets using information from their most recent months of activity. If necessary, they can even adopt a new baseline budget.

But rapidly changing market conditions related to the COVID-19 pandemic, global crises, and the like have required businesses to be more flexible.

Recent supply chain challenges may make it impossible to fulfill orders you expected to ship or create the manufactured products you intended to produce. Conversely, those "challenges” may create for you a windfall of goods to liquidate that were slated for later-year sales but are only now being released because of a backlog at the ports. Labor shortages may also prompt a shift of funds allocated to wages toward investments in automation tools.

What is the budget review and revision process?

Dissecting business expenses allows you to analyze what’s critical to fulfilling your strategy. A top-down budget review will reveal areas to drill into for more strategic examination. Focusing on the income statement elements - your sales and expenses - and your cash flows are critical to guiding ongoing operations. Without the funds to support it, even a solid business plan will create a bottleneck if funding isn’t secured to manage it. Here are two main areas to explore:

• Income: Projects, revenue streams, sales channels, and other elements of your sales budget may have changed in the past six months. Your cost of goods sold — the cost of producing or purchasing your inventory – could highlight the need to adjust your product line if your margins have become too thin.
Consider non-operating income generated by interest income, rental income, and other sources if they’re significant for your business. Interest rates may also impact them and prompt adjustments.

• Expenses: Expenses, as well as capital investments, can be looked at by grouping expenses by the degree of control you have over them or their frequency of occurence. Examples include:
o Fixed costs, such as a mortgage, car payment and insurance, exist regardless of the amount of revenue earned.
o Variable costs related to production volume, which include cost of goods sold, wages, commissions, and certain utilities.
o Non-recurring costs, including, but not limited to, travel expenses for trade shows, equipment upgrades or replacements, and purchases relating to information technology.
Contingencies are buffers added to expense lines to account for known or unforeseeable expenses. Be aware of where contingencies exist, and determine if tightening or adding to them may be appropriate.

Moving forward
Budgets formalize your commitment to meeting goals and objectives while establishing accountability for accomplishing the plan. Evaluating where your current year budget stands in relation to current economic and industry conditions is a worthwhile pursuit as you approach the end of the first quarter. A high-level review may reveal net income after taxes isn’t where it needs to be, and your budget may require a few tweaks here and there to remain in the black.

Tony A. Scott, CPA, JD, is Director of Business Development at Arledge, an Edmond-based public accounting firm. Arledge is a recognized leader in the accounting industry offering practical solutions in the areas of tax planning, auditing, consulting, accounting advisory services and client accounting. Scott was the 2021 recipient of the Outstanding Member in Financial Planning Award given by the Oklahoma Society of CPAs.

This article contains general information only and does not constitute tax advice or any other professional services. Before making any decisions or taking any action that might affect your income taxes, you should consult a professional tax advisor. This article is not intended for and cannot be used to avoid future penalties that may be imposed by the Internal Revenue Service.