What's your next?

If you wanted to guarantee that next year’s budget was wrong, the most efficient method available would be to build it from last year’s. 

That is how most of them get built. Someone exports the actuals, drops them into a new column, and the debate that follows is entirely about the difference: how much more for payroll, how much less for travel, what percentage to apply to the categories nobody has time to examine. 

Some companies skip the exercise altogether. They have a rough sense of what comes in, a rough sense of what goes out, and a bank balance that settles any remaining disputes. The distance between those companies and the disciplined ones is shorter than either would like. One spends what arrives and the other spends what was allocated, and neither figure began as a statement of what the business actually required. Every number in that column is real, reconciled, and defensible. What it records is availability. 

A department handed a number will find a use for the number, and the reasons are ordinary rather than cynical. An underspent line reads as proof the line was too generous, and the correction arrives the following year as a smaller allocation. Managers learn this quickly. Purchases get made in the fourth quarter because the money exists in December and will not exist in January. 

The actuals you are about to build from are therefore partly a product of the budget that preceded them. The number authorized the spending, and the spending now justifies the number. Run that loop three years and a figure that began as an estimate has hardened into a requirement, with a documented history standing behind it. 

The preparation worth doing this month has little to do with assembling numbers. It has to do with deciding which parts of this year earned a place in next year. Every recurring commitment should be required to make its case in front of people who are able to say no. That work is uncomfortable, which is part of why it rarely happens. The base is where the relationships live, and most leadership teams would rather move on to the increment. 

It is also difficult to do from inside the argument. A financial leader who watched the spending as it happened knows which commitments stopped producing and when, and can put that in front of you as observation rather than accusation. If nobody in your company holds that vantage point, find someone before the first budget meeting. Call us or call somebody else, but do not walk into that room carrying only last year’s column. 

Practical Takeaways: 

• Separate the base from the increment before the first budget meeting, and put the base on the agenda. 

• Review fourth quarter spending by department and ask which purchases were driven by need and which by an expiring allocation. 

• Require every recurring commitment added in the past two years to make its case. 

• Decide what you are cutting before you decide what you are adding. 

September is the last month in which the base is still a question. By November it is an assumption. 

Create Your Next!

Nelson Tepfer
Founder & CEO

Understanding financial levers for profitability is crucial for your business’s success. Controlling and predicting factors that drive profits can place your company in a better position for stable and sustained growth.

In this client story, Bruce Card and his ProCFO Vaughn Henson share how Paragon Technology Group transformed its approach to finance with stronger forecasting, greater cash flow and margin visibility, and a forward-looking financial strategy that gives leadership greater confidence in what comes next.

Kenton Gray

Josefina Garcia

                                                                                                      CFO | Principal
Josefina Garcia brings nearly 20 years of experience working directly with owners and directors of small- to medium-sized companies across various industries. [Read More]