fractional cfo, part time cfo

Budget Season – as if the post holiday doldrums weren’t enough. Here we are, putting together a financial roadmap for the next year. Let’s see what that requires:

  1. Managerial buy-in
  2. Executive buy-in
  3. Specific plans for achieving growth with current staff 
  4. A nod toward lenders 

The first step doesn’t have anything to do with numbers – really! It’s all about writing down assumptions that are used to build the numbers. Ok, you can start with year-end numbers, but your budget is then derived from a written summary of assumptions contributed by all Managers explaining where their division numbers are expected to land next year. This, by the way, creates number one on the list above – Managerial buy-in. Each line item on their P&L should be fully outlined understood and by the Managers.

Next, the Executive team blesses the assumptions of the Managers. This process creates number two on the list above – Executive buy-in. It also balances coveted growth with realistic growth. Executives may need to give a good slap to the backside of the “horse” to make sure it’s not walking when it should gallop. The assumptions need to push the organization to hit new highs, not settle into the complacency of past performance. 

Once revenue growth is understood, can teams achieve that without increasing expenses – new hires, new technology, increase in travel budgets, etc. All needs a written assumption associated with these dreaded expense lines. And no changes doesn’t mean no assumptions. If the expenses stay flat, both Managers and Executives need to understand why more resources aren’t needed to achieve this growth (which begs the question why it didn’t happen in the prior year).

Now, Lenders. Do the final projections still true up with loan covenants or hopes of expanded lending to fund growth. The budget needs to be Lender proofed.

The good news is, once this is done we are golden, right? Well, not exactly depending upon which side of the fence you’re sitting on.  You can run with this budget like it’s iron clad and all variances defended to the death by Managers. Or, you treat the budget like a dynamic system where budget busts are treated with a scientific eye, and more tenderness. Why? Because if you don’t Managers might be tempted to hide expenses in categories that aren’t maxed out. Seems ok if the bottom line is the same, but it creates real reporting issues.  What you end up with is financials that aren’t accurate. Remember, financials are just field sonar. You want to know about all of the boogies. If a budget item is busted, there’s valuable information in that.  Investigate why the assumption went sideways and course correct with the new assumption. 

If you follow this process you will not only land close to your target but you’ll understand how you got there.  Approached correctly, it’s an interesting, unifying process and can be, yes, FUN!

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