small business tips: budgeting and forecasting
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Small Business Tips: Budgeting and Forecasting
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Small Business Tips:Budgeting and Forecasting
Dawn Gainer, CPAMarch 9, 2016
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AND FORECASTINGBENEFITS OF BUDGETINGFacilitates strategic thinking
• Where do I plan to go, and how will I get there?
• Where will I focus my marketing dollars?
• Will I need to purchase equipment to achieve my goals?
• Will I need to add staff?
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AND FORECASTINGBENEFITS OF BUDGETINGDeepens understanding of the costs that drive your business
• Identify fixed costs
• Identify variable costs that will fluctuate with the level of sales (e.g., wages, materials)
• Review all costs for possible reduction or elimination
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AND FORECASTINGBENEFITS OF BUDGETINGAids in planning – encourages proactive thinking
• Allows businesses to capitalize on opportunities
• Enables strategy or direction change based on market conditions or actual experience
• Helps to identify the appropriate level of growth, and a plan for achieving that growth
• Improves ability to take advantage of a rising trend
• Allows businesses to anticipate limitations and plan ways to overcome them
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AND FORECASTINGBENEFITS OF BUDGETINGAids in decision making
• Timing of purchases
• Buy vs. lease decisions
• Launching/discontinuing a service or product line
• Marketing/advertising
• Hiring staff vs. outsourcing
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AND FORECASTINGBENEFITS OF BUDGETINGProvides accountability and motivation
• Owners
• Managers
• Sales force
• Owners and employees should be held accountable for setting and achieving the goals of the organization
• Posting visual goals keeps them front-of-mind
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BUDGET VS. FORECASTBudget
• What you plan to have happen; a goal
• Usually static
• One- to three-year time period, can be up to five years
• Challenging goal; but attainable
• Versions (worst case, middle of the road, best case)
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BUDGET VS. FORECASTForecast
• What you think will really happen; not a goal
• Periodically revised based on actual results
• May use budget as a starting point
• Usually covers shorter duration – e.g., one year
• Can be rolling – always covering the next 12-18 months
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WHO SHOULD BUDGET?• All businesses
• All business owners
• Do not delegate this responsibility to the accountants
• Involve owners, managers, sales people, office clerks—all levels of staff
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WHAT SHOULD BE BUDGETED?Revenue and Expenses
• Revenue is the starting point – can be total revenue/sales or by product/service line
• Expense budget should focus on cost drivers
• Variable expenses – those that fluctuate with level of revenue should be adjusted according to revenue budget
• Fixed expenses should be adjusted for known increases (e.g., rent increases, insurance rate increases, etc.)
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WHAT SHOULD BE BUDGETED?Staff/Employees
• The number of required employees to achieve goals
• Pay increases for existing staff
• Benefits – health insurance increases, 401(k) matching increases
• Additional wages for new staff
• Subcontractor wages
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WHAT SHOULD BE BUDGETED?Cash Flow
• Insufficient cash is bad; excessive cash is bad
• Budgeting enables maintenance of just the right amount of cash for your business
• Not all cash inflows and outflows will be captured with only a revenue and expense budget
• Inflows include customer receipts, draws on loans or lines of credit, capital/equity contributions, interest income
• Outflows include payables, payments on loans or lines of credit, owners’ draws, capital purchases
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AND FORECASTHOW TO BUDGETBudget
• Does not have to be elaborate or detailed
• Prior year actual results are a good starting point
• Can be monthly, quarterly or annual
• Document assumptions used when building the budget
• Compare actual results to budget periodically
• Research and understand variances
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AND FORECASTHOW TO BUDGETForecast
• Use budget as starting point
• More beneficial if monthly or quarterly
• Roll in actual results as they occur
• Adjust future months/quarters based on current trends
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AND FORECASTHOW TO BUDGETBottom-Up or Top-Down Approach
• Bottom-Up – gather plans/goals from managers, sales force and employees and combine for total budget
• Top-Down – set budget for total organization and delegate determination of how to get there to employees/staff
• Can be applied to smaller businesses with little or no staff as well – top-down starts with revenue; bottom-up starts with break-even point or desired profit
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TOOLS AND RESOURCES• Budgeting and forecasting software
— PlanGuru, QuickBooks
• Excel or piece of paper
• Industry trends and benchmarks
• Accountants and financial advisors
• Business coaches
• Peers and other business owners
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CONCLUSION• Don’t just set the budget aside and never look at it again
• Review actual results to the budget periodically – focus on the future, not the past
• Analyze variances and adjust your business plan/forecast accordingly
• Take action and don’t make excuses!
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QUESTIONS?
Dawn Gainer, CPAManaging Director, Small Business Services Skoda Minotti