Small Business Tips: Budgeting and Forecasting

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Small Business Tips: Budgeting and Forecasting

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Small Business Tips:Budgeting and Forecasting

Dawn Gainer, CPAMarch 9, 2016

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AND FORECASTINGBENEFITS OF BUDGETINGFacilitates strategic thinking

• Where do I plan to go, and how will I get there?

• Where will I focus my marketing dollars?

• Will I need to purchase equipment to achieve my goals?

• Will I need to add staff?

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AND FORECASTINGBENEFITS OF BUDGETINGDeepens understanding of the costs that drive your business

• Identify fixed costs

• Identify variable costs that will fluctuate with the level of sales (e.g., wages, materials)

• Review all costs for possible reduction or elimination

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AND FORECASTINGBENEFITS OF BUDGETINGAids in planning – encourages proactive thinking

• Allows businesses to capitalize on opportunities

• Enables strategy or direction change based on market conditions or actual experience

• Helps to identify the appropriate level of growth, and a plan for achieving that growth

• Improves ability to take advantage of a rising trend

• Allows businesses to anticipate limitations and plan ways to overcome them

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AND FORECASTINGBENEFITS OF BUDGETINGAids in decision making

• Timing of purchases

• Buy vs. lease decisions

• Launching/discontinuing a service or product line

• Marketing/advertising

• Hiring staff vs. outsourcing

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AND FORECASTINGBENEFITS OF BUDGETINGProvides accountability and motivation

• Owners

• Managers

• Sales force

• Owners and employees should be held accountable for setting and achieving the goals of the organization

• Posting visual goals keeps them front-of-mind

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BUDGET VS. FORECASTBudget

• What you plan to have happen; a goal

• Usually static

• One- to three-year time period, can be up to five years

• Challenging goal; but attainable

• Versions (worst case, middle of the road, best case)

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BUDGET VS. FORECASTForecast

• What you think will really happen; not a goal

• Periodically revised based on actual results

• May use budget as a starting point

• Usually covers shorter duration – e.g., one year

• Can be rolling – always covering the next 12-18 months

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WHO SHOULD BUDGET?• All businesses

• All business owners

• Do not delegate this responsibility to the accountants

• Involve owners, managers, sales people, office clerks—all levels of staff

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WHAT SHOULD BE BUDGETED?Revenue and Expenses

• Revenue is the starting point – can be total revenue/sales or by product/service line

• Expense budget should focus on cost drivers

• Variable expenses – those that fluctuate with level of revenue should be adjusted according to revenue budget

• Fixed expenses should be adjusted for known increases (e.g., rent increases, insurance rate increases, etc.)

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WHAT SHOULD BE BUDGETED?Staff/Employees

• The number of required employees to achieve goals

• Pay increases for existing staff

• Benefits – health insurance increases, 401(k) matching increases

• Additional wages for new staff

• Subcontractor wages

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WHAT SHOULD BE BUDGETED?Cash Flow

• Insufficient cash is bad; excessive cash is bad

• Budgeting enables maintenance of just the right amount of cash for your business

• Not all cash inflows and outflows will be captured with only a revenue and expense budget

• Inflows include customer receipts, draws on loans or lines of credit, capital/equity contributions, interest income

• Outflows include payables, payments on loans or lines of credit, owners’ draws, capital purchases

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AND FORECASTHOW TO BUDGETBudget

• Does not have to be elaborate or detailed

• Prior year actual results are a good starting point

• Can be monthly, quarterly or annual

• Document assumptions used when building the budget

• Compare actual results to budget periodically

• Research and understand variances

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AND FORECASTHOW TO BUDGETForecast

• Use budget as starting point

• More beneficial if monthly or quarterly

• Roll in actual results as they occur

• Adjust future months/quarters based on current trends

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AND FORECASTHOW TO BUDGETBottom-Up or Top-Down Approach

• Bottom-Up – gather plans/goals from managers, sales force and employees and combine for total budget

• Top-Down – set budget for total organization and delegate determination of how to get there to employees/staff

• Can be applied to smaller businesses with little or no staff as well – top-down starts with revenue; bottom-up starts with break-even point or desired profit

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TOOLS AND RESOURCES• Budgeting and forecasting software

— PlanGuru, QuickBooks

• Excel or piece of paper

• Industry trends and benchmarks

• Accountants and financial advisors

• Business coaches

• Peers and other business owners

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CONCLUSION• Don’t just set the budget aside and never look at it again

• Review actual results to the budget periodically – focus on the future, not the past

• Analyze variances and adjust your business plan/forecast accordingly

• Take action and don’t make excuses!

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QUESTIONS?

Dawn Gainer, CPAManaging Director, Small Business Services Skoda Minotti

[email protected]

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