Improving your budgeting muscle begins with setting assumptions
In prior blog posts, we’ve identified the various muscles you’ll want your company to have in place to help excite a future acquirer to pay a premium when they acquire your company. These muscles include strategic planning and execution, financials and cash flow management, KPI management and another is developing and managing your company financial budgeting.
We speak with many owners/CEO’s and too frequently help them identify that their financial budgeting is sorely lacking effectiveness. The issue at too many businesses is budgeting is more of a math exercise than a true strategic planning activity. Too often the budgeting is set by the controller or CFO with little connection to the actual strategic plan of the business. Here is a listing of questions and discussion items to have with your team to strengthen your company budgeting muscle:
- Have we identified our top 3-5 business strategies for the new year and have we aligned these to our new year budget?
- What will the strategies impact be on revenue
- What will the strategies impact be on our cost structure
- In our revenue plan for the new year, have we identified changes we are anticipating or planning for that might change the mix of business we believe we will get? Revenue mix changes from particular customers and/or particular products or services could impact the gross margin which should be captured in your budgeting.
- Have we discussed as a team what budget assumptions we should be making for the new year?
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- Revenue assumptions (see blog post of November 9, “Revenue Walk For The New Year”)
- Labor assumptions - what are we assuming will happen with our headcount and our wage changes for direct and indirect labor.
- Material cost assumptions – what are we assuming is going to happen to the costs that we incur to make or fulfill our product or service.
- Employee benefits assumptions – what is the assumption related to what will happen to the costs related to benefits such as healthcare, vacation days, etc.
- Business insurance assumptions – are we assuming increases or decreases related to business insurances, workers compensation, etc.
- Facility cost assumptions – what are we planning will occur related to the cost of our facility and equipment and related utilities.
- Capital expenditure assumptions – what plant, equipment, computers, systems, etc might we need to enable our strategy that we need to build into our budget.
Showing your future acquirer that your team has a good planning muscle and this leads to having a good budgeting muscle will give them the confidence that they won’t have to introduce these critical disciplines to your company. Use the approaching new year as the opportunity to begin strengthening your budget management so you check a key box for your future acquirer to excite them about the planning muscles you’ve established and that they can continue to benefit from.
