What Is Budget Realignment?

by Kevin Johnston; Updated September 26, 2017

No matter how diligently you construct your business budget, you must acknowledge that it is based on forecasts. When actual numbers come in for sales, expenses, revenues and payroll, you may discover that your budget will need to be realigned. Current numbers are not the only criteria for changing your budget. You must adjust to new forecasts. This can help you set new objectives and realign your budget to meet those objectives.

Performance Targets

You should review your performance targets quarterly, including sales and profits. If you are involved in manufacturing, there also should be targets for production. Performance targets should not be changed lightly, and normally they should remain in place throughout your fiscal year. If you notice a quarter where you miss your targets significantly, monitor the situation see if the change becomes a trend, and be prepared to adjust targets and budget accordingly.

Operating Revenues

Operating revenues are not the same as overall revenues. Overall company revenues can include the sale of assets or other one-time events, such as a tax refund. You need to monitor how much money you earn from sales. This is your operating revenue figure, and it is the amount you can count on to dedicate to the expenses your business incurs each month. If you discover operating revenues have dropped during a quarter, you should use this information to re-evaluate your budget.

Compensation

Payroll can be the single largest expense for any business. If department managers hand out raises and bonuses without looking at the overall financial condition of the company, compensation can become a drain on your budget. Examine payroll expenses each quarter to determine what percentage of your budget you are using to pay employees. When you see compensation figures climbing in comparison to your income, you will know you have a problem either with declining sales or over-compensation.

Fixed Overhead

When contracts must be renewed, you may find yourself paying more for rent, equipment leases and insurance. In addition, property taxes may have gone up. These increases may not have been in your original budget. Check each quarter to see if you are paying more in fixed overhead costs. If you are, these expenses are over-budget and you will have to make some adjustments.

Supplies and Materials

Costs for supplies and raw materials may have risen unexpectedly, meaning the increases are not in your budget. If these expenses are taking a toll on your profits, you will have to realign your budget to allow for the extra expense.

Re-Forecasting

A review of your income and expenses may reveal that you are exceeding your budget, but a single under-performing quarter does not mean you must realign your budget. You must examine whether the numbers you see are the result of a long-term change, such as a declining economy, or a permanent change in demand for your goods and services. Create a new forecast for each element in your budget based on trends you see developing.

Realignment

Realign your budget in response to long-term changes, not temporary peaks and valleys. For example, if materials costs are going up in an inflationary environment, you should change your budget to reflect ongoing increases for the foreseeable future. On the other hand, if your sales have dropped due to the loss of a single client, you may not want to adjust your sales expectations until you have time to replace that client. Always check to see if expenses like payroll can be adjusted by changing management approaches so that your budget is not subject to realignment due to problems you can prevent. In addition, your first action regarding misaligned expenses should be to renegotiate with vendors to see if you can pull expenses back in line with your original budget.

About the Author

Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.