Another planning muscle a future acquirer would like to see you have
When you look one day to sell your company, the acquirer will do their due diligence and among the many things they will be looking for is what types of basic business planning disciplines your team possesses. These basic disciplines include developing a strategic plan for your company as well as building an effective accompanying budget. Lacking these basic disciplines won’t turn them away from wanting to acquire your business but it could make them look even deeper during their due diligence to what basic disciplines they think you’re company is lacking and they then will have to build.
Specific to building an effective annual operating budget, here are some basic considerations to keep in mind:
- Don’t do your budgeting and strategic plan updating in parallel. Budgeting places constraints on your strategic thinking. Do your strategic thinking and planning and then do a proforma financial projection – if the proforma pencils out well then you move it to a budget. If not, then you go back to your thinking and planning to develop a plan to help you achieve your desired financial goals.
- In building a new year budget, evaluate what you got right and wrong about the assumptions that you built into the past year’s budget. You want to learn what you got right and repeat it and learn what you got wrong and see what you can do to not repeat the same mistake in building the new year budget.
- After assessing what you got right and wrong about your prior year budget, you then work on setting your assumptions for the new year. The senior leadership team should meet and discuss the assumptions that will then be used to build the budget. Here are assumptions to discuss and document as you build them into your budget:
- What is the revenue target we’re setting for the new year – see the November 9th blog posting regarding building your revenue walk
- Raw Materials expense – are you expecting an increase, decrease or will it be flat
- Direct Labor expense – increase, decrease or flat to the current year
- Insurance expense – assumptions related to business insurance, employee health insurance and workers compensation insurance
- Utilities – if your business is a large power/water/gas consumer, what increase/decrease assumptions are you making for the new year
- General Labor – what wage increase assumption will you implement in the new year
- Headcount – what increase or decrease will occur in your general workforce – are you planning to add new roles to the company and associated compensation and benefits expense or will it be the same as current year or will it be less
- Travel & Entertainment – this can be a large expense in bigger organizations with a large sales and marketing team – what expense assumption are you planning
- Each month in the new year, compare your actual financial results to your new budget and to prior year actual. Discuss with your team variances and reasons behind them so you can continue to learn and apply the learnings to your future planning and budgeting.
Benefit today from having a stronger financial budgeting muscle at your company and be rewarded at time of your future company sale by building acquirer confidence. Talk to your CPA and your financial team to brainstorm improvements to be made in your budgeting heading into the new year.
