Beware the Micro-Trends
Many organizations use the early fall to begin their budget process for the next year, with fiscal new beginnings in January. One of the biggest challenges to healthy budgeting is often built in to the way most organizations (and their accounting software) report the amounts in each line item on the budget.
Most accounting software will compare this year to the previous year, natively. The problem is that most organizations need to look at longer-term trends. What is more useful is a rolling 12-month actual line item measurement. Comparing this number to previous years removes seasonal cycles of income and expenses.
Beyond the rolling 12-month line item measurement, most organizations should look at 3, 5, 7 and/or 10 year trends in both revenue and expenses. Even if a single year looks really good or really bad in that time frame, it is more likely that the overall trend will continue unless significant changes occur in the organization’s purpose, approach, products or services.
Therefore, it is good to be wary of micro-trends: the bumps, whether up or down, in a particular budget item, in a given 8-, 9-, or 12-month period. If examinations of the trends show a radical shift in a particular line, dig a little deeper: and it may still be best to take the low estimate of income and the high estimate of expenses until the overall trends adjust.