Sobering Budget vs. Actual Results – Are Your Managers Seeing the Same Thing?


Ruth King Photo SmallerManagers got their first budget ever this year. They were a part of the creation of the budget and approved it. They just got their first results – January 2018. Yes, this is later than I like to see it – however, the company is working towards getting their financial statements by the 15th of the following month.

Here are five things they learned:

1. The financial statements were obviously wrong – one department had a negative gross profit – it billed revenue in December for work done in January. So, the department had more expense than revenue in January. Not real. December revenues and therefore profits were overstated and January’s were understated.

2. Other department managers had a similar issue – nothing as bad as one department. They realized that they had to bill all the work in the month the work got done. Otherwise, their gross profits and net profits will not be accurate. As a result, they can’t make sure that the field labor is productive on those jobs. Or, whether the proper materials are assigned to the jobs.

3. The overhead allocation was not accurate. One department had negative rent. Other departments had the wrong allocation of office payroll. If the managers were going to be responsible for controlling overhead, they needed the proper allocation of overhead to their departments.

4. Even though a department was ahead in revenues its net operating profit was below budgeted net profit. Even though it beat the revenue budget, that is not as important as beating the expense budget. It is much better to be behind in revenues but ahead (ie decreased costs) in the expense budget segment.

5. We looked at a preliminary February P&L and balance sheet – it looked really good – we decided that January wasn’t as bad as it looks and February wasn’t as good as it looks. Neither was right.

Managers realized that they have to be accurate in billing and entering expenses so they can make good business decisions based on accurate financial statements.

Do you have the same issues?