Plan Next Year with A Deep Dive into Your Business DNA

Are you planning for next year to be the best one yet? Then plan around a budget and a forecast. Every business should have both. They allow your entire organization to remain focused, as you track toward your next year’s goals. As a result, you and your leadership team can better steer the business along a defined roadmap with regular check-ins and updates. Here are a few best practices when utilizing the two in the decision-making process.

Budget Early. Update Forecasts Regularly.

The process for building the budget usually starts prior to Q4 of the year before (around the month of September), with the help of the CFO function. Aim for an accepted version of it by the end of October, which does not change until the end of the year. The forecast to determine your budget allocation has multiple assumptions based on key business drivers (e.g., SKUs, various revenue streams) and quarterly updates. Once the December books are closed, the assumptions will need to be updated one final time, as Q4 is updated for actuals.

In comparison, the budget remains static throughout the year, while the forecast is usually updated on either a monthly or quarterly basis. Monthly updates occur when cash is tight, and the business is experiencing hyper-growth. However, updating monthly can be expensive and is generally not necessary.

Lay Out the Details for Monthly Reporting.

Be sure to have your budget and forecast structured for board or executive reporting. The budget usually contains more granularity (although this is not required). The details might be departmental OpEx spending and CapEx, in addition to those contained within the forecast. If your business is large enough, members of the leadership team can be appointed to be held accountable for departmental expenses. Those individuals would be responsible for submitting their expense forecast as part of the budgeting process and are held accountable to actual results.

After finalizing the budget, talk with your CFO and Finance team about a prepared month-end reporting deck for the executive team. The content, at a minimum, should have standard financial reports along with variances to the forecast/budget. It may also contain the most recent sales pipeline, operational metrics, and other relevant content that helps business owners and executives understand the state of their business and to be nimble in decision making. Keeping a frequent pulse on how well you align with your initial budget is crucial to evaluating organizational performance.

Variances Are Analysis Tools, Not Crystal Balls.

Expect monthly or quarterly variances, depending on the frequency of your updates, to both your forecast and budget. Forecast variances are analyzed to determine whether the business is headed in a direction short of expectation or exceeding the original expectation. Was a driver missed? Were volume levels missed? Did a hire or expense happen outside the bounds of the original budget? Then, at the end of the quarter, assumptions are updated to coincide with the original direction of the business.

Budget variances are usually investigated for expense and spend control. Does a hire need to be made? If so, was it expected in the budget?  If not, a business case may need to be made to move forward. If expenses are higher or lower than expected (both can be negatives), then the owner of that section of the budget should be held accountable. In addition, the budget is typically the tool used to set expectation around capital expenditures.  The variance analysis should spend time around these expenditures as well to ensure they are being deployed on time for their planned ROI and that the business is properly capitalized to meet the cash flow needs.

Both the forecast and budget should be used as a tool to help manage the business, not act as a crystal ball nor a “check-the-box” activity. Remember, variances occur regularly, so have a seasoned analyst by your side to (a) help you understand the forecast, (b) more easily understand variances, and (c) how it can be used for decision support is immensely critical.

Make It a Part of Your Business DNA.

A properly used budget and forecast process should be part of the DNA of the business.  A strong model and supporting staff can help weak businesses navigate through choppy waters and strong businesses optimize profitability.  9Gauge Partners’ experienced staff can deploy this process for you and, more importantly, help you use it as a management tool to the benefit of your business.