Accurate Budgeting is Fundamental for a Successful Year

Accurate and credible budgeting is one of the fundamental exercises necessary for a business owner both to plan for the upcoming year and to establish a sound foundation for strategic goals for the future.

A budget encompasses estimates and expectations that should drive your anticipated business performance; therefore, it is key that you have a solid understanding of your key business drivers, where the business is heading, and what major items could arise in the upcoming year (and how you might fund those items!). Below are some highlights to consider as you review and prepare your budget:

• • Revenue assumptions and expectations should reflect a combination of known and recurring opportunities, along with an assessment of target opportunities. Some sources of revenue to consider are itemized below. Keep in mind that you want to complete a thorough review of your pipeline and make decisions on whether to include revenue from potential new work based on the facts/circumstances for each specific item. You should also take into consideration any expected changes in pricing for the upcoming year.
    • Work being performed under existing signed contracts/agreements that will extend into the new year.
    • Current backlog of work anticipated to start in the new year.
    • Verbal commitments from prospective customers/clients that may be in your pipeline but have not yet converted to a backlog opportunity.
    • “Go-get” targets based on your strategic goals or outlook for the markets in which you serve.

• • When it comes to expenses, we recommend budgeting for your most significant expenses. Some expenses are fixed and are easy to estimate, while others are variable and depend on revenue or other results.
    • A variable cost is one that fluctuates based on the Company’s revenue volumes. For example, cost of goods sold will increase/decrease as your revenue increases/decreases. Other examples of common variable costs include certain wages and sales commissions.
    • Fixed costs, on the other hand, stay the same regardless of the Company’s revenue volumes. Expenses such as rent, insurance, advertising, and office expenses are some typical examples of fixed costs.

• • Because the nature of many businesses involves seasonality, often the majority of revenue (cash) is received during a specific point in the year, while expenses (cash outflow) continue for several months after the cash was originally received. Thus, it is also very important to not only manage and review your profit and loss statements but also analyze your cash flow on an ongoing basis to make sure your cash levels are sufficient to meet your operating needs.

• The income statement tells one story of a Company’s financial health, but cash is critical to funding and managing business operations. A business can be quite profitable, but without adequate cash flow it will ultimately be unable to continue in business in the long term. For this reason, we recommend that the budgeting process also include a monthly cash flow analysis for the year.

Implementing a budgeting process can take many forms. Many accounting software programs that are available include budgeting features where you can enter your budget and track your actual results throughout the year against your budget. Many organizations simply prefer to track budgets in Excel. Regardless of the form chosen, budgeting is a critical tool not only to understand potential profits but also to ensure adequate cash funding exists to satisfy your business needs.

To learn more about the budgeting process or for assistance with budgeting or cash flow analysis, please contact David Blain, CPA, CVA, Partner and leader of the firm’s Entrepreneurial Services Group (ESG), at dblain@macpas.com.