When you start using your budget as a tool, you may find that your revenue and expense estimates are not falling in line with the actual performance of your company. When this occurs, you have two choices.
The first choice is to not revise the budget you created for the period and continually analyze the differences to determine how you can become more proficient at making estimates for the next budget. This is a good choice if the differences are not that large.
If the variances are large, I recommend that you revise your budget to be more in line with the actual performance of your company. It really doesn’t do you any good to anticipate a certain level of performance for your firm if there is no way your business is going to attain it. It is better to get your expectations (i.e., budget) in line with the actual performance your company will experience for the balance of the budget period. This can also be a good learning experience that will allow you to gain a better understanding of the revenues, expenses, and cash flows of your business.
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