Have you been asked to solve a budget gap? Closing budget gaps is simpler than you may think! Let’s walk through what causes a budget gap, understanding the causes, and steps to close the budget gaps.
What is a Budget Gap?
A budget gap exists when the forecast or budget for a period does not meet the expectations of leadership or the needs of the business. This could mean that revenue is too low or expenses are too high. It means your operating income needs a boost.
Where do the expectations of leadership come from? Commitments made to the board of directors, the shareholders, Wall Street, or even internal strategy. Most companies set long-range plans and need to stay on track. If revenue or expenses go off track (negatively, positive is usually welcome), it is Finance’s job to guide the business back to expectations.
Understanding the Budget Gap
First, you need to understand where the budget is out of alignment. Corporate Finance teams will usually distribute materials with revenue, expense, or income targets in larger companies. In smaller companies, you can ask leadership for guidance directly.
Once you understand the target, compare it to your current budget or forecast. It will calculate the “gap to solve” when you do this. You will need to solve a revenue gap by driving additional revenue. Keep in mind that revenue usually comes with additional expenses, so be mindful of the total impact. You will need to solve an expense by reducing expenses. Combining increased revenue and lower expenses will help solve an operating income gap. This may seem like common sense, but it is critical to understand the driver of the gap to solve it properly.
Strategies to Close the Gap
Target Budget Owners
First, you can target the owners of specific departments or operating groups within your company. Start by taking the total gap and spread it methodically across the groups. Keep in mind that not all groups are created equal. It is usually easier to target cost-only departments than revenue-producing departments that drive the business.
Target P&L Line Items
Next, you can choose to target specific line items across an entire company. This would apply regardless of department. This is a common approach for discretionary spendings such as travel, consulting fees, and other internal services. Zero base budgeting is a great tool for honing in on spending levels across the company.
Gap Closure Lists
Lastly, instead of centralizing the process and pushing out targets, you can include the business and create gap closure lists. Through this process, Finance coordinates with operations leadership to identify areas of opportunity in revenue and expense. You can then prioritize each item by risk to the business and ease of execution. Finally, senior leadership solves the gap by working through the list, approving or denying each item.
Budgeting And Forecasting Software
Whether you run a small business or a large company, budgeting and forecasting software can help you make sound financial decisions. This type of software can help you track your income and expenses, estimate future revenue and expenses, and plan for future growth. Budgeting and forecasting software can also help you monitor trends in your industry so you can make informed decisions about where to allocate your resources.
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