Do you know how much revenue your business is going to deliver in the next year? What’s your profit forecast? How many goods/items will you be able to deliver to your clients? How many man hours will you need for each month to make this happen?
It is common sense that all activities in the business have a financial consequence. Many business owners’ responses to these types of questions is “How could I know?”
Well, it would be gold to predict the future operations 12 months ahead. CEOs and executives would be able to plan just enough resources to cater for it accordingly. However, nobody is 100% accurate in their predictions.
Moreover, if we plan the business operations activities at the beginning of the year and manage business according to these plans with disciplines, our results won’t be too far from our predictions. We call this process “Budgeting”.
A client I have been working with recently, is turning over in excess of $30 million with 12 business segments and over 200 employees. The business adopted a “top-down” approach to budgets many years ago. Most of the managers didn’t even know how to check their budgets. Effectively, their budgets had been not very informative.
I was brought in as the interim Chief Financial Officer to implement a set of more suitable budgets within short period of time.
After investigating their databases and legacy systems, I managed to extract relevant mega data with the help of query tools. Furthermore, I suggested that the Activity Based Budgeting (ABB) approach would benefit them in the long run.
What happened next
- Planning meetings were held with all business managers to identify daily activities and 12 month action plans
- Identifies cost pools and cost drivers within each business segment
- Extracted, transformed and loaded historical data from and to the relevant databases
- built customised data models to quantify the business plans
- Time series analysis, multi-factor regression analysis and stress-testing
- Presented findings and action plans to all business heads in language everyone could work with
- Tested the numbers with various scenarios
- Conducted retrospective forecasting
As part of the budgeting journey, we highlighted the business improvement opportunities and the ways in which to realise them. In fact, this was pushed by the Activity Based Budgeting.
Consequently, the senior executives were thrilled with the “Porsche budgeting experience”.
What does it mean to you?
Budgeting is a disciplined management process that every business needs to achieve the optimal commercial outcome.
A part-time CFO will review and build out your business plan so that your budgets and forecasting make commercial sense.
Lastly, it is never too early to start planning, and it is never too late to roll out budgets into your everyday business management.
Written by Clinton Cheng, CFO at CFO Centre Australia
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