I have been making budgets for way too many years in scores of industries, sectors, sub-sectors, mid sized companies, small companies, start-ups, growth, turnarounds, privately held, VC/PE held, publicly held; well I guess you get the drift.
As the senior accounting/finance person (the titles have been different over the years, but the responsibly in this instance was the same), I was charged with making a budget that represents both revenues and costs for the foreseeable future (be that 12 months, 18 months or longer).Â Simple task or so one would think.
Some of you would be amazed, others surprised and a smaller sub-set will chuckle when I say, I as the person who makes the budget, let’s say as the Chief Financial Officer cannot do it in a bubble, on my private island with no access to anyone save my very intelligent dog. For those of you who are dog people, he is a cross between a King Charles Cavalier Spaniel and Cocker Spaniel. The designer dog lovers call this breed a Cockerleir and pay big money for pups; we believe in getting dogs from rescue groups, so we just call him Mr. McQ). But I digressed.
Parts of the Budget
All businesses should have a budget for revenues and expenses. Everyone knows how simple it is to shake that magic eight ball and ask the question How much will revenues be this year! But it’s not simple and most CFOs don’t have a magic eight ball, but they have a marketing department and maybe a CMO, a sales department and maybe a CRO and quite possibly some consultants and prior history.
Therefore, the formulation of the revenue piece of the budget just became a team approach with my job, as CFO, to be the Team Leader, the Project Manager, the Realist and Lord High Questioner. In other words, it is nice you people gave me this number. It’s really close to last years, or it’s really high/low; but really how did you come up with the number. I want to see the data you used, a list of people you spoke with, etc.
Once I am satisfied that the number makes sense, remember it’s a best guess; then I will accept and use that number. Asking them to move the number to reach a magic bottom line number is dishonest, especially if i am asking them to inflate prospective revenues. This also goes for the average mark-up percentage.
How can we turn around and charge more for the same item (whether we got a price increase or not from our vendor/operation) if we aren’t providing value. So another duty is to question our value proposition vis a vis our products, or competitors and the market place itself. Let’s not forget to factor in the geopolitical atmosphere of the locales where we operate and what or market growth plan is as well.
Moreover, since I talked about our growth plan, what is or does our strategic and tactical business plans say?Are the revenues (and for that matter the costs) in line with what the Board has dictated?
Same sort of concepts are used for the Cost of Goods Sold, if we have inventory and all the operational expenses. It’s a team approach with me as the CFO having the same duties, but possibly, most definitely now working with a new set of team participants who are involved in purchasing, managing other areas of the company, those who are responsible for head count and the list goes on.
So who really makes the budget?
I can honestly say it is or at least it should be a Team approach, with my role as coordinator or project manager reaching out to both internal and external subject matter experts to create a projection that it not only realistic, but attainable.
So it is not my budget, it is our budget. I may have to defend it before the Board, and they may call it my budget, but it isn’t. A budget done properly has a lot of different hands involved, and lots of managerial know-how, negotiations and personality at work. The final product is not mine it is ours!
My view on the final product
Now I always like to add some fat into my budgets, as a way to hedge our bets. I always try to use a slightly lower revenue number and slightly higher expense numbers. If both these numbers become reality, then the company matched the projected net income/EBITDA number of the budget.
However, if we do a better job at cost containment, then we’ve made more money. In addition, if we sold more than anticipated, we made more money. Moreover, if we really were lucky and spent less on expenses and sold more product or services, then we; the organization; may have had banner year!
Query: So why do Hiring Managers feel that the CFO needs so much industry or sub-sector experience to do the budget? Maybe you can enlighten me?