All businesses need financial budgets, although unfortunately many times the approved budget for the current year is finalized around the year-end close. Not very useful! As an early stage venture – or an existing company with new technologies – it is vitally important to prepare a financial budget, then use it each month (or week, or even day) to ensure you are meeting your expectations.
A budget is routinely prepared each year for the following year, based on historical and expected results. Personnel incentives, quantity discounts and equipment needs are just a few of the reasons why preparing and routinely reviewing the budget is so important. Some companies use break-even analysis as a starting point—that is, your revenue must be at least equal to all your expenses. Therefore, you can determine how many “things” you need to sell, and at what price, to break even for the year. Most important, the budget process should focus on revenue projections, and in a great amount of detail: sales commissions rate, location of purchaser, expected bad debts, change orders / product or service variations, warranty costs, foreign currency fluctuations, just to name a few of the assumptions. Thankfully, there are many tools to assist in this process, from basic Excel spreadsheets to Salesforce.
Forecasts and Projections
Financial forecasts and financial projections are technically different reports with different assumptions; however, they are often used interchangeably. For new ventures, there really is no difference, as the company has no historical data upon which to base the assumptions—all the assumptions are based on market conditions and the company’s resource capacity. These reports usually include several years.
A well-done financial projection should take hours of research to ensure you can actually sell your product or service and still make money. Financial projections are often formulated during strategic planning initiatives. Unlike budgets, where the accountant will review budget-to-actual fluctuations of every line item, financial projections focus on the “macro” financial expectations of the company, like targeting a specific geographic location, purchasing a competitor’s business, potential for unionization and the state and local tax impact of new legislation. Moreover, financial budgets are “owned” by the CFO and his/her staff, where financial projections are “owned” by the CEO, board of directors and other stakeholders.
As we move into the fourth quarter of 2015, don’t forget to dust off your budget templates, put on your thinking caps and prepare detailed budgets and financial projections for your business.
For more information on budgets, forecasts and projections, email Paul Etzler or call 440-449-6800.