Connections for Success

 

09.30.20

Budget Planning: Three Things to Ask Before Building Next Year’s Budget
Chris Arndt

It is budget-planning time. After a year that may very well have derailed your budget, and despite how begrudgingly you might enter this process, now is the time to plan next year’s budget. Digging deeper into the essential questions from budgeting and forecasting for high-growth companies is a great place to start.

Related Read: Five Steps to Building Your Budget

Creating Next Year’s Budget

  1. What Key Assumptions are We Making?
    Begin by being honest about what you can assume for the year ahead and plan for multiple scenarios. Has the COVID-19 landscape changed your market and is it likely that it will continue to affect your market? Take into account your supply chains, liabilities and any loans coming due, along with the limitations on your assets. Depending on your business model, you will have different revenue drivers for which you need to budget. More accurate assumptions can be made with well-rounded, company-wide input.

    Cloud CFO Tip: Set top-down goals, but ensure reasonableness from the bottom. Your tactical managers can help with this. For more accuracy and buy-in, involve the right members of your team who have a good sense of operations, sales and business development and understand the current market trends.

  2. Will We Have the Needed Cash Flow?
    This is the question of the hour. Remember that your profit and loss statement (P&L) does not equal cash flow. Review your accounts receivable, accounts payable, inventory, fixed assets and deferred revenue.

    Cloud CFO Tip: Start with your statement of cash flows and then work backward through your balance sheet and P&L. As you begin budget planning, set yourself up for success by asking your controller for your cash runway and burn rate. Liquidity, current and quick ratios can help give you insight into your cash flow and financial health.

  3. What are Our Drivers of Growth?
    Finally, focus on your growth drivers. Begin with budgeting your revenue drivers and then move on to budgeting expenses. The most important are your cost of goods sold (COGS) and variable costs. Finally, work through your semi-fixed expenses, taxes, and depreciation and amortization.

    Cloud CFO Tip: Do not spend time drilling down items like staplers and office supplies, but do be detailed when budget planning growth drivers.  Break them down to the smallest key metric (e.g., 20 new customers each month = one new hire or 2,800 widgets sold).

    A quick reminder: Creating a budget is valuable because it forces your business to plan. Your budget is simply a stake in the ground to use as a reference point for forecasting and strategizing. You could be way off and that is okay.

Reviewing and Revising the Budget

Now that you have finished planning next year’s budget, do not forget to review and revise. While traditionally budgets are made with historical financials and unlinked data, we work with our clients to provide dynamic cash flow forecasts to better understand budget variances and how they can adjust. In the current financial climate, this forward-thinking approach to financials becomes even more important.

Need help planning your budget for next year? Contact Chris Arndt at carndt@orba.com or at 312.494.7014. Visit ORBA.com to learn more about our Cloud CFO Services. 

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