How can you measure and evaluate budget and forecast performance?

When you prepare your budget, do the best you can to make a realistic assessment by account and line item. This gives a realistic perspective to compare to. If you have major changes during your budget period, note these for adjustment in the next budget cycle. Compare actuals to budget monthly. How are you doing? Analyze by account and line item. Any unanticipated expenses or revenue? Any expense or revenue adjustments that can be made? Present the material honestly to stakeholders. Encourage them to be part of the solution, and help them understand the problems.

A budget forecast that is achieved on the threshold of plus or minus 5% ( over or under ) is the accurate one. Budget and or forecast making requires in-depth assessment of the business direction through historical data analytics driven by future or plan initiatives to further boost business performance.

Defining evaluation criteria is a critical phase in the financial management process. This allows you to establish a clear and objective framework for measuring the success or effectiveness of your projections and budget. Criteria such as accuracy, reliability, timeliness, completeness, relevance and alignment with strategic objectives are fundamental to a complete and meaningful evaluation. It helps establish clear standards and provides an objective basis for identifying areas for improvement and taking corrective action when necessary.

One of my Mentors had set a simple goal- Budget = Forecast = Actual ?? In real world this is seldom achieved. The quality of any budget or forecast is determined by the quality of underlying assumptions. An analyst has to do a deep study of the business dynamics, past performance, current market conditions and then arrive at realistic but challenging base assumptions. Then they should by debated and eventually there has to be a clear buy-in form the entire management team. When actual events occure the same should be compared to the base assumptions to complete an objective variance analysis. A variance driven by an unforecastable event is an acceptable variance. But variance driven by an event that was forecastable is unacceptable.

Percentage variance thresholds will vary between a mature 60 year old company and a startup that made a major change to its business model in June. You really have to look at why there is a variance.

Most often finance professionals are faced with self bias when it comes to budget preparation and forecast, thus, coming up with safe budgets and forecasts with a slim margin of error bearing in mind performance appraisal and evaluation at the end of the financial period. One ought to understand the fundamentals underlying company/ industry average and the growth envisaged by the entity before coming up with a budget and forecast as they have to conform with set goals of the company. Once this key element has been addressed a standardized matrix has to be formulated and accepted prior to the ensuing period to avert skewing of KPI's to suit actuals. Define Scope Set feasible yet competitive deliverables Adopt a standardized matrix Evaluate

As one of the contributors shared, knowing your personal bias is important. Are you conservative or aggressive? Do you process the future through opportunities only or do you account for downturns and ask “what if” questions? Looking at historical data and past forecasts can be very helpful. Consider what innovations have been created to support a different outcome, if any, and don’t forget the economic cycle. Create best and worst case scenarios and measure your forecast against the actual on an ongoing basis. Then adjust your methodologies based on the past performance with a thoughtful explanations using reason/logic and research.

There tends to be a bias to not reflect cyclical or seasonal relationships into the budgets (to just evenly load them across each month). They also will include a management reserve. Both of these tools make variance analysis a little challenging. I find calculating an indicated final (IF) for the end of the year to be a better means of describing to executives where they are with the budget. The IF can convey commitments management has already made so they don't over commit and overrun the budget.

To assess the quality of the budget it is necessary that it makes sense with the company's reality. Like in a puzzle game, you can see that a piece is not in the right place. This sensitivity comes with experience. But a good look at the main indicators gives this answer.

Assessing the impact of your budget and forecast is not just a financial exercise; it's a strategic imperative for business owners. By identifying and prioritizing the key drivers of revenue and expenses and aligning them with your desired outcomes, you can make more informed decisions and drive sustainable growth. Regularly reassessing your assumptions in light of actual business performance ensures that your financial strategy remains accurate and adaptable. This proactive approach prepares your business for a resilient and prosperous future, where you can navigate challenges with confidence and seize opportunities as they arise.

Besides the churn part of the budget or the budget driven by headcount for each department the budget needs to reflect one-off initiatives or projects. Functional managers often find it hard to come up with an ROI for these efforts. The responsibility of the budgeteer is to force them into a sound basis of estimate, schedule and ROI for each project. Your CFOs and CEOs will appreciate you for this. Eventually, the functional managers will as well (as their projects are successfully approved).

Evaluating your budget and forecast process is vital for fostering collaboration and engagement within your organization. A robust budget relies on input from all facets of your business, including external partners. To understand its impact, gather diverse perspectives. Assess the process's strength by recognizing its value. Ask yourself: Did our budget and forecast process lead to positive actions and outcomes for our business?Were crucial aspects overlooked? Who should be included in the future? Addressing these ensures forecasts play a key role in strategic planning, contributing significantly to your business's success.

Each year I have my staff review and improve on the budgeting process. In doing this we often discuss with the executive we support what went smoothly and what didn't. Each year we find ways to improve it. Over time, this makes it easier to defend our costs to the Government for pricing purposes. It is also required by regulation. Lastly, we find appreciation from the executives we serve, with less stress and confrontations between them and the CEO and CFO.

I've been doing this for about 45 years. Having a model that reflects the business drivers and builds upon historical averages or organizational averages is accurate enough for non-special circumstances. For those special circumstances, building a sound basis of estimate that is time phased for the project's schedule and projected outputs is key.

Conducting a financial review workshop was extremely helpful for low level managers and participating new team members for obtaining a deeper understanding their budgets and the impacts of various line items ( especially items they can readily impact) that can have on their fiscal targets. Workshops allowed for the sharing of certain best practices that impacted specific line items ( labor, training, supply expenses etc). Additionally, understanding what specifically was included in subcategories provided some insight on where managers could concentrate on impacting when there was a variance ( either positive or negative. Having monthly financial reviews were helpful and encouraged managers to reach out to one another for best practices.

The ability to communicate effectively with budget owners, who do not have a financial background, is a game changer in today's market. Speaking in lament terms and leaving out the jargon gives budget owners the impression that they are speaking with a human-being - not with a robot who analyses numbers all day long. Other benefits for budget owners: 1) they are more likely to ask questions, rather than blindly accepting your advice 2) they feel motivated to achieve their budget targets, rather than being resistant 3) they won't be afraid to reach out to you for a helping hand - not just relying on that 1-hour meeting you have together every month.

Compare Actual vs. Budget: I regularly compare our actual financial results to the budget we set. This helps identify areas where we're on track and where we might need adjustments. Variance Analysis: I dig into the variances between actual and budgeted numbers. Understanding the reasons behind these differences is key to making informed decisions. Scenario Planning: I'm a big fan of scenario planning. It helps us prepare for different outcomes and make contingency plans, ensuring we're ready for whatever comes our way.

I've taken what I have learnt from budgeting and forecasting for multiple organisations, and applying the same knowledge to my own personal finances. I have my own spreadsheet to track and monitor my income vs. expenditure every month and forecast for the remainder of the year. This has helped me to track where I am spending most of my money (travel, hobbies, shopping, etc.) Then asking myself questions such as: 1) where do I need to cut back on spending? 2) have I allowed for unforeseen expenses? 3) how could I increase my income? I've learnt that it's best to monitor your own finances, rather than leaving it completely to uncertainty.