The CFO’s Process of Developing Budget Plans & Forecasts
No one has a crystal ball. With that said, we can make educated guesses about the future and put together budget plans and forecasts to help us prepare for what may be coming our way.
In this blog post I'll share with you our process of how we take all the information collected from various sources and turn it into something actionable so that we are always prepared!
STARTING A DETAILED BUDGET
In our experience, we have found that the key to successfully managing through uncertain times is having a detailed budget plan. With this in mind, we will walk you through what goes into creating one for your business!
First and foremost, an up to date and accurate set of books is absolutely necessary. Without an accurate set of books you will not be able to forecast your numbers, and you won't know what the financial implications are of any decision.
This is where a CFO comes in handy - they help with this by ensuring that all accounting procedures are followed properly.
FORECAST NEXT YEARS REVENUE
Next up we need an idea of our revenue forecasts for the coming year. A good starting point here would be to run a P&L by month and determine what kind of trends you're seeing (your POS sales reports can also be helpful here). Do your sales fluctuate? Are they steady? Or have you been on a consistent upward trajectory? Is there anything that can be cut?
Most business owners are not experts in the field of forecasting, so here's a good place to bring in that CFO again. They can take this information and run some more detailed forecasts.
You'll also want to know the broad market trends, as these will impact your numbers.
For instance, if you're in a highly competitive industry like retail and have been on an upward trajectory but then see sales start trending downward - this is going to be reflected in your forecast.
DETERMINE OVERHEAD
The next step would be to decide what your overhead will look like.
To start here, make a list of fixed monthly recurring expenses. Typical accounts are rent, utilities, insurance premiums and software subscriptions.
If using the Profit First system, this is when you'll take a deeper look at your financials and run a Profit First assessment to see where you need to adjust to fit into your respective target percentages. This will allow you to allocate every dollar generated to cover inventory, owner's pay, taxes, and most importantly, Profit!
From there we need to estimate any variable expenses you have for the month.
Typical examples would include payroll or commissions to your sales staff, utility bills based on consumption and so forth. You'll then need an estimate of what revenue will look like over a 12 month period.
For Profit First implementation, these variable expenses will be the portion allocated to OpEx. For most, this change is the hardest but also has the biggest impact as this will allow you to think creatively in order to achieve the same results with less resources.
PUT TOGETHER A BUDGET
No one is born knowing how these numbers come together and what they mean. It takes time to learn all of them and make sure you're making the best decision at any given moment. Be patient with yourself and try not to make hasty decisions.
Once you have an idea of what the forecast for your business looks like, it's time to look at how this translates into a budget.
For most, this is the most eye opening since you're now analyzing which direction your business needs to go to reach your goals of running a successful and profitable business.
If you're using the Profit First system, this is where we take your revenue and compare it to other successful businesses in that income range to determine your target allocation percentages (TAPS).
Before you know it, you're putting together a budget and most likely looking to see how much funding your business needs.
Budgeting is an art that takes time to perfect and the more experience you have in this area will only help improve what works for your specific situation.
You'll need to make some tough decisions. Do we cut costs in this area or do I pursue other avenues? What are the benefits of investing in a new product, service or marketing campaign? How much will it cost and what would be an appropriate timeline for these investments if they're made at all?
Having a CFO can help you answer these questions and more.
Once you have a clearer idea of what your company needs, it's time to see how those priorities will be funded and if that includes fundraising efforts or cuts in spending elsewhere.
TIP: before making any final decisions on where the budget is allocated for next year, talk with your team about their goals and objectives. It's important to have a team you can rely on, who will be just as invested in reaching your company goals as you are.
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