Building and implementing a budgeting and forecasting process is critical to revenue growth. Proper data combined with established forecasting best practices make for better strategic decisions for the business growth.
How can you make budgeting and forecasting more manageable and straightforward?
How can you make budgeting and forecasting more manageable and straightforward?
Involve the team
The best budgets are created when you engage your team in the process for it secures necessary team commitment to making the numbers work. It is always advisable to break the total budget into departmental budgets and have the leader of each department manage her / his budget. Each team member should work on the budget they impact most. A thorough review of each budget assumption is conducted to ensure everyone understands the impact on the total business. The finance department is responsibility for accumulating all departmental budgets into a total company document, which is then discussed with all team members to agree changes.
The best budgets are created when you engage your team in the process for it secures necessary team commitment to making the numbers work. It is always advisable to break the total budget into departmental budgets and have the leader of each department manage her / his budget. Each team member should work on the budget they impact most. A thorough review of each budget assumption is conducted to ensure everyone understands the impact on the total business. The finance department is responsibility for accumulating all departmental budgets into a total company document, which is then discussed with all team members to agree changes.
FOCUS ON FUTURE
Always investigate the future and do not base next year’s budget only on past results. Budgets has little to do with what the past and everything with the future. That does not say you should not know or understand the past. Focus on future goals for a better aligned and reasonable budgets.
Always investigate the future and do not base next year’s budget only on past results. Budgets has little to do with what the past and everything with the future. That does not say you should not know or understand the past. Focus on future goals for a better aligned and reasonable budgets.
EXAMINE INDUSTRY TRENDS
It is sensible that you examine industry past and predicted future trends from industry organizations. Furthermore, contact key customers to find out directly what to expect in the coming year. The closer you get to the industry and customers in your forecasting, the more accurate your forecast will be.
It is sensible that you examine industry past and predicted future trends from industry organizations. Furthermore, contact key customers to find out directly what to expect in the coming year. The closer you get to the industry and customers in your forecasting, the more accurate your forecast will be.
HISTORY IS VITAL FOR THE FUTURE
The quote “History repeats itself” did not come by accident. Always understand what happened in the past to project the future.
Sharhabeel Mansour, Partner in Baker Tilly Jordan says, “We have seen business leaders base their growth percentages only on a historical wish, rather than on future realistic supported assumptions.”
Management should start by a review of the available data including sales leads and conversion, average sale amount per customer, repeat sales as well as lifetime value, operational expenditures, and past profits. They should intimately review fluctuations in monthly sales and expenditures and investigate why and how they occurred.
The quote “History repeats itself” did not come by accident. Always understand what happened in the past to project the future.
Sharhabeel Mansour, Partner in Baker Tilly Jordan says, “We have seen business leaders base their growth percentages only on a historical wish, rather than on future realistic supported assumptions.”
Management should start by a review of the available data including sales leads and conversion, average sale amount per customer, repeat sales as well as lifetime value, operational expenditures, and past profits. They should intimately review fluctuations in monthly sales and expenditures and investigate why and how they occurred.
FOCUS ON CRITICAL AREAS
Management should communicate what they are trying to budget to the team. For most business leaders, this usually relates to how much cash the company expect to generate. While sales growth, gross profits, and operating profits are essential, management must ensure they generate positive cash flow. This involves a review of the non-Income statement items such as capital expenditures plus changes in working capital that accompany revenue growth. If the initial budget is not generating positive cash flow, management shall on adjusting operational expenses, working capital, and capital expenditures.
Management should communicate what they are trying to budget to the team. For most business leaders, this usually relates to how much cash the company expect to generate. While sales growth, gross profits, and operating profits are essential, management must ensure they generate positive cash flow. This involves a review of the non-Income statement items such as capital expenditures plus changes in working capital that accompany revenue growth. If the initial budget is not generating positive cash flow, management shall on adjusting operational expenses, working capital, and capital expenditures.
PLAN FOR PROFIT
A budget is one of the most basic and necessary financial tools for managing business income and outflow to meet financial obligations and grow the business. To optimize the effectiveness of the budgeting activities, management should plan for profit and take control of the company’s destiny through forecasting positive cash flow to cover operational and capital expenditures.
A budget is one of the most basic and necessary financial tools for managing business income and outflow to meet financial obligations and grow the business. To optimize the effectiveness of the budgeting activities, management should plan for profit and take control of the company’s destiny through forecasting positive cash flow to cover operational and capital expenditures.
EXECUTE ON DATA
To make the budgeting process efficient, management should embrace the process, execute the data, and analyze the results. Too often, management gives excuses as to why they do not prepare a budget and a forecast. Common excuses include taking too much time, it is distracting, and it is unreliable.
Bakertilly believes these excuses can cause the demise of a company as without proper budgeting and forecasting process in place, operational plans may not be in sync with sales strategy; inventory flow may be off; cash flow may be in jeopardy; and there will be a general lack of financial insight.
To understand the data, companies should develop a dashboard to monitor its KPIs on periodical basis. Every month, management should review its working budget against the actual results to allow for proper and timely reaction to pivot the business into avoiding lost sales and unnecessary expenses.
To make the budgeting process efficient, management should embrace the process, execute the data, and analyze the results. Too often, management gives excuses as to why they do not prepare a budget and a forecast. Common excuses include taking too much time, it is distracting, and it is unreliable.
Bakertilly believes these excuses can cause the demise of a company as without proper budgeting and forecasting process in place, operational plans may not be in sync with sales strategy; inventory flow may be off; cash flow may be in jeopardy; and there will be a general lack of financial insight.
To understand the data, companies should develop a dashboard to monitor its KPIs on periodical basis. Every month, management should review its working budget against the actual results to allow for proper and timely reaction to pivot the business into avoiding lost sales and unnecessary expenses.
SPLIT BUDGET INTO MANAGEABLE FUNCTIONs
Bakertilly suggests the best way to create a complete and straight-forward forecast is to split the different parts of the projection into manageable interrelated budgets to work on each assumption efficiently. This includes, amongst others, sales, direct and indirect Labor, CoGS, and G&A.
Bakertilly suggests the best way to create a complete and straight-forward forecast is to split the different parts of the projection into manageable interrelated budgets to work on each assumption efficiently. This includes, amongst others, sales, direct and indirect Labor, CoGS, and G&A.
QUESTION REVENUE GENERATING ACTIVITIES
Management should evaluate its sales year-on-year to ensure a meaningful forecast. This includes an evaluation of the percentage of repeat sales and whether this ratio is changing. Furthermore, one should evaluate the product mix to determine which products and services are growing, and which are shrinking. A careful evaluation of these factors will enable the identification of a realistic sales target and a potential stretch target for sales. Starting with a well-justified sales number will allow management to develop sensible budget expenses for the business and to do “what if” scenarios for changes to the sales target.
Bakertilly contends that the sales review should not stop at the budgeting stage but must be monitored throughout the year with periodical results reporting to:
Management should evaluate its sales year-on-year to ensure a meaningful forecast. This includes an evaluation of the percentage of repeat sales and whether this ratio is changing. Furthermore, one should evaluate the product mix to determine which products and services are growing, and which are shrinking. A careful evaluation of these factors will enable the identification of a realistic sales target and a potential stretch target for sales. Starting with a well-justified sales number will allow management to develop sensible budget expenses for the business and to do “what if” scenarios for changes to the sales target.
Bakertilly contends that the sales review should not stop at the budgeting stage but must be monitored throughout the year with periodical results reporting to:
- Assess the sales trends for changing customer behaviors
- Evaluate the effectiveness of the product mix
- Project the implication of the identified sales trends
ACTIVE VS STATIC BUDGET
A budget is another version of the annual plan where it provides a view of what numbers to expect during the year. Just like the yearly plan, the budget is not cast in stone and must be regularly updated during the year as the plan changes.
A budget is another version of the annual plan where it provides a view of what numbers to expect during the year. Just like the yearly plan, the budget is not cast in stone and must be regularly updated during the year as the plan changes.
“Companies typically prepare an annual budget for their accounting year. Bakertilly, however, always prefer a rolling 12-months profit plan, which means re-forecasting the next 12 months every quarter, so you always have a one-year plan.”
Yazan Al-Shweiki, Senior Accounting Specialist at Baker Tilly Jordan
Budgeting weaknesses became evident during the past two years for companies prepared an initial budget but were lost on how to update it to adapt to the dramatic change in the business environment during hardship times. Adopting an active budgeting process in lieu of a static document enables management to mitigate unforeseen risks and capitalize on opportunities.