Just About Time for the “B” Word (Part 2 of 2)
Budgeting and Planning
By Mark Palmer, President e:countable, LLC
If budgeting and planning for your business or non-profit is new to you, it may seem to be a daunting task. However, just take it one step at a time and don’t let all those numbers intimidate you. This article is geared toward established businesses vs. start-up businesses. Many of the concepts are the same but applying them for startups is considerably different than for established companies.
History Lesson – The first thing that is essential is to understand your historical financial results. This is often difficult even for some very successful business owners since they don’t have a strong functional grasp of what their financial statements are really telling them: what’s the difference between a P&L, balance sheet and cash flow statement, and how do they all interact? Therefore, the first thing I do with new clients is to walk through how to interpret their financial statements.
Unfortunately, what I often find is that their financial statements are a complete mess. The client’s bookkeeper may do a good job paying bills and managing payroll, but knows very little about proper accounting. Therefore, before starting the budget process we need to clean up the books and understand why changes were made.
Different Strokes for Different G/L Accounts – Now that we have a good understanding of a company’s financial history, what methodology do we use for projections? A few examples are:
Percentage increase or decrease over prior year or month<
Percentage of another G/L account where there is a cause-effect relationship
Historical trend using regression analysis
Projections based on seasonality
All of the above methods may be used in a company’s budget model depending on the nature of each revenue and expense account, and materiality. By the way, zero-based budgeting requires the budget to be developed from the bottom up with supporting detail and justifications.
Setting up your budget model (in Excel or a budgeting software) with the appropriate forecasting methodology can be time consuming initially. Future revisions take much less effort and time to update if the model is set up properly to begin with.
The Right Level of Detail – There are three, possibly four facets to this issue. Keep in mind one of the reasons for developing budgets to begin with is to help you better manage your business. So you should be tracking and projecting financial information at the level that reveals where you’re making money and where you’re not. Your budget is a tool to help you manage and evaluate the success of your business.
1. Time – Budgets are typically prepared for a one year time period and should absolutely be developed by month (or 4-week period for some industries). Developing a business plan with three, five or ten-year projections is a different animal.
2. General Ledger Accounts – Your chart of accounts should be tailored to your business so it captures manageable and useful information. Too much detail can be just as bad as not enough detail.
3. Slicing and Dicing – Breaking up a company into logical profit and cost centers in the accounting system is an extremely useful way of understanding where a company is making money and where it’s not. For example, a separate P&L would be generated for each location of a multi-location company, or by business line, etc. This also provides a mechanism to hold managers accountable for what they are responsible for.
4. Job Costing – Tracking profitability by individual job is a must in some industries, like construction or government contracting. With job costing you are able to see how each job or contract has performed, and compare performance against budget.
Your thought process in developing your budget should reflect your thought process in managing your business. Just as you are constantly required to make decisions about your business as a result of new developments and changes in market conditions, so should you be revisiting your budget and updating it based on most recent actual results as well as your latest assumptions for the future. We suggest updating your projections at least quarterly.
If you’re ready to take your business to the next level, please contact us and see how our CFO Consulting Services can be of value to you.
Mark Palmer: Bio