A common question that arises when I’m helping a business with creating a budget is: how often should the budget be updated?
It’s a good question. You set your budget for the calendar year, and by the time May or June rolls around, you realize that your projections were wrong. Do you update the budget for the remainder of the year, or leave as-is?
Here are two thoughts I’ve heard from professionals I’ve talked to. My opinion falls somewhere in the middle of these two thoughts.
Thought One: Leave As-Is
Advocates of this approach believe that a yearly budget should not be updated or revised mid-year. They argue that a budget is a management tool. If the middle of the year arrives and your projections are off, you leave the budget as-is because it’s a way to gauge how well you’ve managed the business.
Thought Two: Update the Budget at Intervals
Under this approach, you update your yearly budget periodically during the year based on how things are trending. Typically this means no more than quarterly. You don’t rip your budget apart just because a month or two were off. But if it’s mid-year and things are trending differently than you expected, it’s time to re-adjust the budget.
What I Advocate
What I tell people is: it depends. If you look at your budget and see that your projections were way off, the first thing I recommend is to think about the remainder of the year and try to project if the full-year budget will be reasonably accurate once all 12 months are in the books.
If it’s May and your revenue projections are way off, ask yourself if this problem is likely to correct itself during the rest of the year. For example, maybe a big contract that you were anticipating to receive in April got delayed until July. In that case, I wouldn’t rip the budget apart, because that revenue is coming, just at a slightly different time than projected.
But if a big contract that you were anticipating to receive was canceled altogether and there’s no prospect of a new contract replacing that revenue, then you’ve got a major change that needs accounted for in your budget.