What to Do When Your Budget Is Blown Find out how to learn from your mistakes and what your next steps are.

Q: When my budget goes off the rails, should I try to get back on track or start over?

A: Unlike most business questions—to which my response is typically "It depends"—this one has an unequivocal answer: Yes, you need to start over. But that doesn't mean you should trash your original budget and all the work it entailed. Use this predicament to isolate what went wrong and learn from it so you can make a more realistic budget.

Start with a rigorous examination of the current budget against the actual results. Look at each month, as well as year-to-date totals. Take every line item and look at the differences, then examine what caused those differences. Were your projections off, or was performance better or worse than expected? Why? Was it due to regular occurrences or one-time incidents, such as weather, a lawsuit or an accident?

Say sales revenue fell below budgeted levels (a common occurrence, as virtually every forecast I've ever seen is overly optimistic). Where did sales fall short? Were particular salespeople shy of their targets? Why? Do the same analysis by breaking down sales by product, territory, store, factory or whatever metrics you use in your projections.

Then analyze the cost of sales and the resulting gross margins on your products or services. Again, you should examine the budgets and results by the breakdowns that make sense for your business and point to actionable items. Finally, do the same for all overhead expenses. Were your actual heating bills 20 percent higher than you budgeted for? (Many companies on the East Coast faced this costly reality last winter.)

Don't skip analysis of cash flow. Were cash shortages driven by lower profits? Did collections slow down and inventories pile up, or you did you have to buy new equipment outside of your budget?

Once you determine what happened and why, take another look at your original budget and determine which, if any, year-end targets are still attainable. Now you're ready to build a new budget, along with an action plan to achieve it. For example, if your goal is to boost revenue and you decide to hire another salesperson, be sure to account for the time it takes to hire someone and for that person to ramp up, as well as the recruiting, training and additional compensation expenses that need to go into your new budget as a result.

One tip I can't stress enough: Don't go through this process on your own. Bring your entire management team—not just the finance department—into the exercise. Those on the front lines will have precise information about why shortfalls occurred, and will most likely contribute meaningful suggestions and corrective actions.

During one of the best sessions I've conducted, I projected the budgeting software I was using on my laptop onto a screen in the conference room. As I made changes in projected results, everybody could see them in real time. Reactions were immediate and strong, and in the end we had a plan everyone supported.