Hopefully, every company's goals for next year have been set.  With those goals in mind, a budget helps give financial clarity to support those goals.  If not already done, there's no time like the present to put one in place before the new year begins.   Yes, budgeting is difficult for most of us, but as time goes on, the process becomes easier and accuracy improves.  The first budget is always the most difficult budget.  A company with a budget is more likely to hit its goals than a company without one.

  Budgeting can be accomplished in a variety of ways.  The easiest and most traditional approach is to take historical numbers and ratchet them up or down in line with the projected business level for the next year. Most accounting software packages offer some tools to automate the process, so that's a good place to start.  In QuickBooks, for example, this is a fairly straightforward process.  Also, once the budget is in the system, generating financial reports comparing actual results to the budget in the next year is a relatively simple process.

  Zero Based Budgeting (ZBB) is another approach, whereby every number must be justified by managers - a real crowd pleaser!  ZBB is more difficult to pull off, of course, but it ensures that a good deal of thought goes into the budget and those held accountable have input.

  A "top down" budget sets revenues and expenses on a company-wide basis, and revenue and expense amounts are pushed down to departmental levels using various "drivers" such as capital deployment, number of employees, square footage, etc.  This may lack precision, but it is efficient and keeps the focus on what the company's overall results are expected to be.  A "bottom up" budget would involve starting at the most basic level and adding up the numbers.  When those numbers don't add up to an acceptable company-wide total, there must be a back and forth process to reach consensus on the final totals.  The budgeting process must be started early to allow enough time for this process!

  Whatever the methodology, the numbers should be tweaked to allow for anticipated changes in the landscape for the coming year.  The budget should be in sufficient detail to let managers know what is expected, to facilitate accountability.  Time spent on details which doesn’t significantly improve the usefulness of the budget is time better spent running the company.  A budget is only a tool.  Once the fiscal year is underway, the budget can be changed monthly or quarterly to reflect actual conditions which differ from the original assumptions.  This is especially true given the current state of flux for the U.S. economy; any company owner has to wonder why he or she should even try to set a budget for 2011.  It's hard to know if a tax increase is coming or not.  The cost curve for health care is not predictable.  Increased cost of operations will result for many industries if some type of cap and trade program is mandated.  Compliance with an ever increasing regulatory environment continues to bite big chunks out of the bottom line.  Interest rates and inflation are very low, but for how long?  Using Excel, or another financial tool, it is possible to create different budget scenarios - most likely, worst-case and best-case.  This process provides forethought on what actions might be required if things turn out worse than expected, such as trimming staff or cutting other expenses, or what steps would be required to expand if business is significantly better than expected.  Planning is the key.

  A very important part of the budgeting process is the creation of a cash flow plan.  Starting with budgeted amounts from the balance sheet and income statement, a cash flow worksheet can be generated for the budget period.  This is especially important when the budget is done on an accrual basis.  A financial plan that shows a profit on an accrual basis isn't necessarily one which will generate cash.  If sufficient cash will not be produced, the plan and budget need to be adjusted.  For companies with seasonal fluctuations, a cash projection by week or month may be a good investment of time.  Having adequate cash flow every day of the year is important for any company.  A bank line of credit can help manage fluctuations, and when one is available, advances and payments should be plugged into the budget, making certain the amount of the operating line is sufficient.  If the operating line is asset based, a borrowing base projection would also be a good idea, to make certain advances will be possible.  Capital asset purchases need to outlined as a part of the budgeting process and should be plugged into the month of intended acquisition.  Obviously, as equipment purchases can be significant, timing of acquisition may need to be altered to better fit the cash flow plan.  So many decisions, so little time.

A B2B CFO^® partner can be of assistance to a company wanting to prepare or refine its budget.