How to test the validity of your budget figures

Key to having a successful budget is having valid budget figures within your budget. It is absolutely vital that you know how to test the validity of your budget figures so that your budget will be accurate both in predicting figures and tracking actual costs and incoming profits. Inaccurate figures will end up in skewed predictions and also improperly tracked money. This will end up in fiscal disaster for your company because money is not being realistically tracked and there will be shortfalls in terms of projects and possible over-spending of money on different projects.

The central idea and key point for a solid and accurate budget is the proper forecasting of revenue. If you can accurately predict your revenue, then you will have a much easier time coming up with valid budget figures for your direct costs and indirect costs that go towards coming up with that estimated revenue. Thus you will have a much more accurate depiction and picture of what your financial performance will be and what you need to achieve in order to meet your financial goals.

However in order to come up with valid budget figures and accurately test the validity of your budget figures, you need to include more than just financial data in your budget estimates and forecasts. You need to know how to include key variables that will also affect your financial performance. These key financial variables are also called drivers. Including these drivers in your budget will help you come up with valid figures on your budget. Here's how you can make sure that your budget figures are valid, and how you can test the validity of your budget figures.

1. Identify budget drivers by using the budget process to make sure that you know what drivers are affecting and can affect your financial performance.

2. Perform scenario analysis so that you can evaluate how different drivers will affect your revenue and thus affect your budget. This will help you come up with valid budget figures and can help you test the validity of your budget's different figures.

1. Identifying budget drivers

There are a number of different factors that can affect your budget and the validity of your budget figures. For example, your competitors might come out with new products, they might leave the market, they might enter the market, and they might cut prices. Your suppliers might go out of business and you might have to go find new suppliers, at new prices. There are other problems-new government regulations can change the way that you go about your business strategy. You can mitigate these risks by identifying them first. After identifying the risks, then you can figure out what the drivers are that will affect your budget.

2. Come up with scenarios for analysis

After you come up with the key drivers that will affect your budget, you need to come up with scenarios that you can test. Make sure that when you design your budget model, you come up with three scenarios: a worst case scenario, an average case scenario, and a best case scenario. Then you can run the drivers for each of those scenarios so that you can determine what your budget outcome might end up being. This type of scenario analysis will help you figure out what your most accurate budget estimate will be based on different things that can happen.

Periodically, run your figures through your budget to make sure that your numbers are corresponding with your predictions. If they are not corresponding, then you need to look at where your numbers are coming from, or revise your overall budget.

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