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How to Budget Based on Trends

Original post by Lisa Bigelow of Demand Media

When business conditions are changing, developing a budget that anticipates where the trend is going is wise and appropriate. The skilled manager or budget analyst must review historical data, draw conclusions based on those facts and balance that knowledge with current market conditions and what she believes will happen in the future. The results of this analysis will be presented as the new, trend-based budget. The calculations are simple; looking into the future is complex.

Contents

Step 1

Perform a variance analysis. The first clue that a trend analysis is necessary is the results of a variance analysis. A variance occurs when actual data significantly out- or underperforms against budget, and is calculated by dividing the difference between the actual and the budget by the budget. When this variance occurs consistently and over a multi-year period -- despite budget and forecast adjustments -- further examination is necessary.

Step 2

Perform a trend analysis. The trend analysis calculates how much one account has changed over a multi-year period. For budgeting purposes, the best way to determine the trend is to calculate the percentage change year-over-year. Begin by subtracting the earliest year's actual from the next-earliest year's actual, then divide the difference by the earliest year's actual.

Step 3

Repeat this analysis for subsequent years to determine the trend. A five-year history will result in four percentages. Note the direction that the change is going. Is it consistently increasing or decreasing? If so, then you have a strong indication of where your new budget needs to begin. If it's not consistent, was there a business condition or one-time event that resulted in abnormal results? In that case, consider "normalizing" the results. Normalizing results eliminates unusual activity.

Step 4

Analyze the current market and facts that will affect the future. Knowing where you've been by completing the analyses is only half of the equation; the current market, and factors that will affect the business's future dealings will also have an affect on the budget. For example, a hot new product that's just been granted a patent or that will be newly sold in an overseas market means that revenue may increase faster than anticipated (remember that expenses will rise, too). Alternatively, if sales have been dropping consistently, this might be the year they "fall off a cliff." Balance your facts with your market call, and the budget will fall into place.

Step 5

Develop your budget using the results from Steps 3 and 4. If your product has grown at a rate of 10 to 15 percent per year for five straight years and there are still markets you haven't permeated, make your new budget higher by 10 to 15 percent. Alternatively, if your product is fully marketed or your percentage increases have been slowing, reduce your new budget increase accordingly. Decreases often accelerate over time, as well. Don't forget to adjust your expense side, as changes in revenue usually exchange expenses, as well.


                   

Things Needed

  • Historical data, at least 2 years

References

About the Author

Lisa Bigelow is a freelance writer and editor. She is a former financial analyst and worked at a college, a media company and an investment bank. She also contributes to Patch. Lisa graduated from the State University of New York, Plattsburgh with a Bachelor of Arts in mathematics.


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